The regulator issued a master circular, which mandates insurers to pay special surrender value (SSVs) after the first policy year, provided one full year’s premium has been received.
For policies with limited premium payment terms of less than five years and single premium policies, SSVs become payable immediately after receipt of the first full-year premium or single premium.
Previously, the surrender value for guaranteed return products was zero in the first year and up to 30-35% in the second and third years. The new regulations propose introducing benefit payouts in the first year, which will affect the margins of life insurance companies. However, some insurers believe the impact may be minimal, as over 85% of policies tend to remain active beyond the early years.
“Most life insurance companies’ 13th month persistency is over 85% which may not see much impact but others could have some impact on growth and margins,” said a life insurance executive.
Insurers can now offer higher Guaranteed Surrender Values (GSV) than those specified in the regulations, which may vary based on factors such as premium size, premium paying term, policy term, and the duration elapsed at the time of surrender. The new regulations also stipulate that the Special Surrender Value (SSV) should at least equal the expected present value of the paid-up sum assured, paid-up future benefits, and accrued benefits.”The extent of the impact will depend on changes in policyholder behaviour and what insurers do to improve persistence and curb mis-selling,” said another life insurance executive.IRDAI has asked insurers to examine persistence across all distribution channels and implement measures to improve long-term benefits for policyholders and address issues related to policy lapses and mis-selling that often lead to financial losses to policyholders.
To ensure transparency, insurers must now include policy year-wise GSV, SSV, and surrender values payable in benefit illustrations. This move is intended to provide clearer information to policyholders about their potential returns and benefits.
Also, all non-linked savings products offering surrender value must now have a policy loan facility based on the eligible surrender value. Insurers are asked to provide this facility to annuity products with a ‘Return of Purchase Price’ option.