Insurers' returns may take a hit: Brokerages on IRDAI's proposal to up life insurance surrender value

Brokerage firms have reacted to the proposal by insurance regulator IRDAI to increase the surrender value of life insurance policies. They have said that the implementation could have an adverse impact on the Internal Rate of Return (IRR) of insurance companies. IRR is used in capital budgeting to estimate the expected return of an investment.

IRDAI Proposal

The insurance regulator, IRDAI, released a crucial consultation paper on increasing the surrender value for life insurance policies. In insurance, ‘surrender’ refers to the voluntary termination of a life insurance policy by the policyholder before its maturity or before the insured event has occurred.

When a policy is surrendered, the policyholder is no longer obligated to pay premiums, and the insurance coverage ceases. However, the life insurance company is obliged to pay a certain amount of surrender value to the policyholder who has paid the premium for the said interim period.

Jefferies on IRDAI's proposal

Jefferies has mentioned that this new concept of threshold premium may raise the surrender values and trim fees for insurers. It further mentioned that insurers may offset some impact by lowering costs. The lowering of cost may form 40-45% of Annual Premium Equivalent (APE) and Value of new business (VNB). Annual Premium Equivalent is the sum of the total value of regular–or recurring–premiums plus 10% of any new single premiums written for the fiscal year. Value of new business is the present value of the future profits associated with new business written during the year.

Nomura on IRDAI's proposal

Nomura has said that this proposal could lead to higher surrender value, lower VNB margins for non-linked insurance products. It also added that it may deter long-term investing by policyholders.

The agency went on to say that the implementation of the proposal could have adverse impact on IRR on non-linked insurance products. It also said that it would have significant implications on product design, pricing and viability of non-linked products. It has predicted that Max Life and HDFC Life will be the most affected and SBI Life will be insulated if proposal is implemented.

CLSA on IRDAI's proposal

CLSA has said that there may be a drag on the margins but extent of the margin will depend from insurer to insurer. It went on to call a more favourable surrender value for end customers will be double edged swords