The new rules would put insurers in a dilemma – they must either lower sales or lower profits to address premature policy closures. If insurers cut commissions to make room for higher payouts, it could impact sales. On the other hand, if they retain commissions or pay higher ones, they will suffer a loss in profits.
The regulator has not set a specific threshold value, but in an example, indicated that the surrender value would need to increase nearly 1.8 times the current level in the second year and 0.8 times higher in the fifth year. Sources told the Times of India that the objectives behind this move are to curb mis-selling by encouraging insurers to spread out commissions, which are currently concentrated in the first year, and to incentivize insurers to improve policy persistency.
These new rules are part of Irdai’s proposed insurance product regulations, which have been shared with insurers. According to the draft circular, each product will have a defined premium threshold beyond which no surrender charges will be imposed, regardless of the timing of the surrender. The proposed threshold for surrender charges is much lower than what many companies currently deduct from insurance policies. Companies usually deduct surrender charges to cover their upfront costs associated with selling a policy. For example, in some cases, 75% of the first-year premium goes towards various costs, primarily commissions paid to corporate agents or individual agents.
This is not the first time that the insurance regulator has addressed surrender charges. Over a decade ago, the regulator capped the maximum amount that insurers could deduct from unit-linked insurance plans (ULIPs). This decision followed a dispute with the Securities and Exchange Board of India (SEBI), which accused insurers of selling ULIPs that imitate mutual fund plans. The cap resulted in insurance companies shifting their focus to traditional products.
