IRDAI Shakes Up Life Insurance: Higher Surrender Values, Lower Charges Proposed

The Insurance Regulatory and Development Authority of India (IRDAI) has introduced a vital consultation paper aiming to revise the surrender value in life insurance policies.

The term 'surrender' in insurance denotes the voluntary termination of a policy by the policyholder before its maturity or the occurrence of the insured event, allowing cessation of premium payments and the cessation of coverage.

However, the insurer is obligated to offer a surrender value to the policyholder for the premium paid during the interim period.

Sources suggest that IRDAI has long been scrutinizing scenarios where policyholders received minimal surrender values despite paying premiums for several years. Additionally, there have been instances where insurance products were designed in a way that led to substantial surrender charges, retaining a significant portion of the premium paid by the policyholder.

The proposed consultation paper by IRDAI aims to ensure policyholders receive a notably higher surrender value for surrendered policies while reducing the surrender charges imposed by insurers.

While this benefits policyholders, granting them a substantial portion of the premium paid if the policy does not reach maturity, it can impact insurers' margins as they will be required to pay higher surrender values. The non-participating portfolio is anticipated to bear the brunt as surrenders are more prevalent in this segment.

Impact & Threshold Reforms

Illustrating this proposal, consider a non-participating policy with an annual premium of ₹1 lakh, surrendered in its fourth year. Under the current scenario, if three premiums have been paid totaling ₹3 lakh, the surrender value is calculated based on the premiums paid during the policy's tenure, with 35% return on that value.

However, IRDAI proposes a significant overhaul in the surrender value computation. Besides the Guaranteed Surrender Value, IRDAI suggests that insurers should refund premiums beyond a certain threshold to policyholders. For instance, considering a ₹25,000 threshold, for a three-year policy, the total threshold amount would be ₹75,000.

This threshold value will now form the basis for calculating the surrender value, accompanied by refunds beyond this threshold. With this reform, the total surrender value to be disbursed to the policyholder is augmented significantly.

Reactions and Actuarial Insights

BC Patnaik, Member (Life) at IRDAI, emphasized the incorporation of substantial actuarial inputs in the consultation paper on increasing the surrender value. Patnaik assured life insurers that their concerns and opinions regarding the consultation paper would be duly addressed, inviting their feedback.

What is IRDAI?

IRDAI stands for Insurance Regulatory and Development Authority of India. It's a statutory body established under the Insurance Regulatory and Development Authority Act, 1999, and functions under the Ministry of Finance, Government of India.
Here's a breakdown of what it does:

Function of IRDAI:

• Regulates and develops the insurance industry in India. This includes overseeing all types of insurance, from life insurance to health insurance to motor insurance.

• Protects the interests of policyholders. IRDAI sets standards for fair practices, ensures transparency, and resolves disputes between policyholders and insurance companies.

• Promotes the growth of the insurance industry. IRDAI issues licenses to insurance companies, sets guidelines for product development, and encourages innovation.

Key Responsibilities of IRDAI:

• Framing and regulating insurance laws and regulations.

• Issuing licenses to insurance companies and intermediaries.

• Setting minimum standards for solvency and claims settlement ratios.

• Protecting policyholder interests through grievance redressal mechanisms.

• Promoting research and development in the insurance sector.

• Monitoring and supervising the conduct of insurance companies and intermediaries.

Impact on Policyholders:

• IRDAI plays a crucial role in ensuring that policyholders get fair treatment and value for their money.

• By setting standards and regulations, IRDAI helps to prevent insurance companies from engaging in unfair practices.

• IRDAI also provides a mechanism for policyholders to file complaints and seek redressal if they are unhappy with the service they receive from their insurance company.

Overall, IRDAI is a vital body that protects the interests of policyholders and promotes the healthy development of the insurance industry in India.