Explained: No respite for life insurers as IRDAI keeps surrender value at nearly 80%

After multiple rounds of discussions, the Insurance Regulator (IRDAI) has come out with final regulations on surrender value to be paid by life insurance companies to policy holders in instances of early surrenders of life insurance policies.

As per the proposal from IRDAI, the Special Surrender Value (SSV) has been kept at elevated levels.

The move will be a big negative for life insurance companies particularly HDFC Life Insurance and Max Life Insurance.

Both HDFC Life and Max Life have a higher exposure to non-participating segment which is more vulnerable to policy surrenders

Multiple relaxations had been sought by life insurance companies on the proposed SSV regulations but IRDAI has not obliged much except for giving a small cushion of 50 basis points over 10-year Government Security yield for calculation of SSV.

Understanding IRDAI's latest draft proposal on increasing surrender value (SV)

For understanding IRDAI’s latest draft on increasing SSV, let’s use an example of a 10-year life insurance policy with a sum assured of ₹1 lakh and annual premium of ₹10,000.

At maturity the policyholder will get ₹1.5 lakh which will include ₹50,000 as bonus.

With a 10-year G Sec at 7% and a 50 bps cushion over it, if one assuming the policy gets surrendered after payment of first premium itself then

What will be paid-up sum assured?

No Of Premiums Paid
_____________________ X Policy Returns Upon Maturity
Amount Of Premium Paid

1
_____ X 1,00,000 = 10,000
10,000

Present Value Of Paid-up Sum Assured= ₹10,000 + ₹5,000 (Bonus)= ₹15,000

What will be paid-up future benefits?

Discounting Of No Of Years For Which Premium Is Outstanding Post

Surrender At 10-yr G-Sec Rate

15,000
__________ = Rs 7,823 (Special Surrender Value)
(1.075)9

The insurance companies will have to pay higher of Guaranteed Surrender Value (GSV) or Special Surrender Value (SSV) to their policyholders.

What has happened so far on increase in surrender value?

December 2023

• IRDAI proposed to increase Guaranteed Surrender Value (GSV)


• IRDAI’s December proposal proposed increasing GSV to over 2X of existing value


• IRDAI’s December proposal on increasing GSV faced strong resistance from life insurers

March 2024

• IRDAI decided to keep GSV at existing levels and did not take any hike


• Move on keeping GSV unchanged came as a big relief for life insurers

April 2024

• IRDAI expressed intention to increase Special Surrender Value (SSV)


• Increase in special surrender value would take total surrender value payable by life insurers higher

May 2024

• IRDAI proposed framework/mechanism to increase Special Surrender Value


• Insurers to submitted their feedback seeking relaxations on proposed increase in SSV by May 31

June 2024

• IRDAI releases final regulations, keeps special surrender value at elevated levelsSurrender value under different IRDAI's proposals

As per IRDAI’s draft proposal in December 2023, life insurers’ would have ended up paying ₹8,300 On ₹10,000 premium paid as surrender value which is 83% premium received.

As per the rates fixed by IRDAI on Guaranteed Surrender Value (GSV), life insurers’ would have paid ₹3,000 on ₹10,000 premium paid which is about 30% on premium received.

As per the IRDAI proposal on Special Surrender Value (SSV), life insurance would end up paying ₹8,159 on ₹10,000 premium received which is about 82% of the premium received.

As per final regulations, life insurers would pay 78% of total premium received as surrender value to policyholders.

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