New surrender value rules to cut returns by 10-20 bps; agent commissions tied to persistency: Prashant Tripathy, Max Life

Starting October 1, life insurance policyholders in India enjoy a major relief when it comes to surrendering their policies. Under the new regulations set by the Insurance Regulatory and Development Authority of India (IRDAI), surrendering a life insurance policy now yields a payout even after just the first year of premium payments. Previously, policyholders had to wait until they had paid at least two years of premiums to receive any surrender value.

This shift is a significant step toward protecting policyholders’ interests, particularly those who might find themselves in financial distress early in their policy term. The revised rules ensure that a portion of the premiums paid is not lost if a policy is surrendered within the first year, marking a more flexible approach in the life insurance space.

However, this newfound flexibility comes at a cost. Life insurers will face higher expenses due to the increased surrender payouts, which is likely to impact the returns for policyholders who stick with their policies until maturity. Prashant Tripathy, MD and CEO of Max Life Insurance, said, "With the new surrender rules in effect from October 1st, we anticipate an overall margin impact of 100-200 basis points. Our management team is working diligently to minimize even this margin compression. The changes mainly benefit policyholders, especially those surrendering early, but come with a cost."

Previously, surrender values were calculated using a formula based on the yield of government securities (G-Secs) plus 200 basis points. Now, the new formula uses G-Sec yields plus just 50 basis points, enhancing the payout to policyholders across all durations. Surrender values will be available from the first year itself, representing a significant shift from the older regime where no payouts were offered during the first year.

"To manage the impact, we've adjusted distribution compensation. This includes deferring commissions or creating clawback mechanisms if certain persistency targets aren’t met, promoting better quality sales. There’s also a marginal reduction of around 10-20 basis points in returns for maturing policyholders to balance the adjustments. A key focus for insurers in the wake of these changes is improving persistency, which is the measure of how many policyholders continue with their policies over time. Tripathy states that Max Life is striving to raise its 13th-month persistency rate from around 87-88% to 95%. Achieving higher persistency will not only help insurers manage the impact on margins but also ensure that customers continue to benefit from long-term insurance coverage.

For policyholders considering surrendering their policy, it’s important to understand what surrender value entails. It is essentially the payout a policyholder receives when ending the policy before its maturity, also known as early exit payouts.  Under the revised guidelines, insurers must ensure the surrender value reflects at least the present value of the paid-up sum assured, future benefits, and any accrued or vested bonuses. This calculation must also consider any survival benefits already paid, with the interest rate for these calculations capped at the yield on 10-year government securities plus an additional 50 basis points.