Business News: Starting in October, a new regime offering higher payouts on early exits will take effect in the life insurance sector. This change is part of the updated insurance product regulations issued by the Insurance Regulatory and Development Authority of India (IRDAI) in March, with detailed guidelines released in June.
These rules have been applied to new products since their launch, but life insurers were given until September 30 to adjust their existing plans to meet the new norms.
Increased Special Surrender Value (SSV)
Under the new regulations, the Special Surrender Value (SSV), which is the payout given for early exit, will increase for endowment policyholders. This is particularly relevant for those exiting due to mis-selling or financial difficulties in paying premiums. Previously, policyholders lost the entire premium if they exited after one year. Going forward, they will receive a portion of their premiums back. However, the surrender value for unit-linked insurance policies and term insurance plans will remain unchanged.
Industry Pushback
Many life insurance companies had opposed the changes, citing concerns over asset-liability management (ALM) mismatches. These long-term plans are not designed to provide liquidity early on, and insurers argued that the new rules could hurt the returns of policyholders who stay with the plan for its full term. Instead, insurers proposed refunding premiums in cases of mis-selling rather than increasing surrender values.
Support for the New Rules
Despite opposition, some insurers and experts view the new regulations favorably. They believe policyholders will benefit, especially those who let their policies lapse early. The new rules could also curb mis-selling, as they encourage insurers to link agent commissions to policy persistency.
For example, Emkay Global’s research indicates that a policyholder with a non-participating endowment policy would now receive a substantial portion of their premium back upon surrender after the first year, compared to losing the entire amount under the current system.
Other Key Changes
Beyond surrender values, additional rules will also come into force. For instance, life insurers must now provide a Customer Information Sheet (CIS) with policy documents. The CIS will clearly outline the policy’s terms, benefits, and conditions in simple language, making it easier for policyholders to understand complex policies.
Additionally, insurers will face stricter penalties for failing to comply with insurance ombudsman orders on time, with a daily penalty of Rs 5,000 if they do not respond within 30 days.