14th & 15th December 2023, BSE Index went up by around 2%. However, Listed Life Insurers on an average fell over 5%. What was the trigger?
12th December 2023, the Insurance regulator had released an exposure draft on product regulations, 2023. It is just a draft and they have invited for comments/suggestions from various stakeholders for changes to the draft before 3rd January 2024.
Which part of these draft regulations have caught the attention of the stock market?
It is related to the Surrender value. The draft regulations talk of value payable should be fair and reasonable to policyholders. The draft regulations state:
“There shall be a premium threshold defined for each product, wherein, there shall not be any surrender charges imposed on the balance of the premiums beyond such threshold limits, irrespective of the timing of the surrender”.
The draft explains through example the surrender values payable to the policy holder.
- Non-Linked Savings Insurance Policy
- Annual Premium: Rs 100,000
- Term 20 years
- Assume threshold is 25,000.
Policy holder wants to surrender after payment of 3 annual premiums.
Total premium paid in 3 years is Rs 300,000.
Amount paid above threshold limit needs to be refunded back in full. Hence Rs 75,000 * 3 = Rs 2,25,000 should be refunded back.
Out of the premium within threshold limit, that is Rs 25,000 * 3 =Rs 75,000, insurer has to guarantee a percentage of the premium within threshold limit as surrender value. Assuming they guarantee 35%, then 35% of Rs 75,000 = Rs 26,250 has to be refunded.
Hence, out of a total premium of Rs 3,00,000 paid in three years, the policyholder, if he decides to surrender after 3 years, will get a minimum of Rs 2,25,000 + Rs 26,250 = Rs 251,250.
How does it change from current situation?
In the current situation, surrender values are very low and likely that for the above example, the policyholder might have got lower than Rs 1,50,000 if he decides to surrender after 3 years. A clear loss of more than 50%, which improves, if the draft goes through to 16%. A huge pro-policyholder step by IRDAI.
Of course, Insurers will not be happy and may represent for changes. The current stock market reaction is a result of this expected change in regulation.
Why do policy holders like to surrender within few years of buying the policy? It is mainly because of mis-selling. They realise that in this combination product of insurance and investment, they are neither getting adequate coverage nor getting decent returns. Returns for most investment products from life insurers tend to be lower that the fixed deposit returns. In the above example, a policyholder could think rather than paying 17 lakhs in the next 17 years, he may prefer to take a hit on the Rs 3 lakhs already paid.
Why do life insurers pay so little in case of surrender within few years of purchase of policy? It is mainly because the life insurers expenses are front loaded. The commission they pay in first year are very high and they slowly taper down. Also, their marketing expenses tend to be very high. Hence, the huge penalty for policyholders who wish to surrender their life insurance policy.
Normally, policyholders for whose benefit these changes in regulations are being made by IRDAI, don’t comment, or suggest on such draft regulations. Whereas insurers, whose profitability will be affected suggest changes.
We need to wait and see whether this draft pro-policyholder regulation will go ahead in the current form or the life insurers succeed in making the regulation less friendly to policyholders.
