📰 At a Glance

• What happened? – In June 2024, IRDAI introduced new surrender value guidelines, significantly raising early exit payouts for policyholders.

• LIC’s move – LIC has approached IRDAI seeking changes, citing operational and financial concerns.

• Core issue – Benchmarking surrender value to 10-year G-Sec yields and restricting spread to 50 bps.

• Impact – Policyholders gain, insurers face margin pressure, LIC wants flexibility.

• What’s next? – Possible review of benchmark, spread relaxation, or phased implementation.

What is Surrender Value?

Surrender Value is the amount a policyholder receives if they exit a life insurance policy before its maturity. It provides liquidity in case the policyholder needs cash unexpectedly.

• Paid-up Surrender Value – If you stop paying premiums, the policy becomes paid-up and the surrender value is calculated on the reduced sum assured.

• Special Surrender Value (SSV) – Enhanced amount calculated based on IRDAI guidelines, often higher than the standard value, especially for long-term policies.

Example of Surrender Value

Suppose you buy a life insurance policy with:

• Annual premium: ₹1,00,000

• Term: 20 years

• Total premiums paid after 3 years: ₹3,00,000

Surrender scenario:

💡 Takeaway: The new guidelines significantly increase the cash available to policyholders in case of early exit.

The New IRDAI Guidelines (Effective October 2024)

• SSV Calculation: Present value of paid-up sum assured, future benefits, and accrued benefits (minus survival benefits already paid).

• Discounting: Based on 10-year G-Sec yield with a max 50 bps spread.

• Policyholder Benefit: Surrender value rises from ~30% to 70–75% of premiums paid.

• Additional features:

  • Free-look period extended to 30 days

  • Policy loans and partial withdrawals allowed

📊 Old vs New vs LIC’s Proposal

Why LIC is Concerned

1. Portfolio Mismatch: LIC invests mainly in 30-year G-Secs (~7.1% yield); using 10-year G-Sec inflates payouts.

2. Margin Pressure: Insurers report 75–400 bps margin compression due to higher SSV payouts.

3. Operational Readiness: Sudden implementation leaves little time for product and system adjustments.

Industry Context

• Dec 2023 Draft: IRDAI initially proposed even higher surrender values; insurers pushed back.

• Mar 2024 Final Rules: IRDAI balanced customer protection with insurer sustainability.

• June 2024 Implementation: Guidelines rolled out; policyholders gain higher liquidity.

• Q3 2024 Results: Insurers reported margin squeeze but acknowledged improved customer trust.

What Lies Ahead?

IRDAI must balance:

• Policyholder interests: High surrender values enhance liquidity and financial security.

• Insurer sustainability: LIC and others need flexibility to manage margins.

• Likely outcome: Possible phased rollout, flexible benchmarks, or differentiated rules for large vs small insurers.

Conclusion

LIC’s push to review surrender value guidelines highlights the delicate balance between customer benefit and insurer profitability. Policyholders stand to gain from enhanced liquidity, but insurers face financial and operational challenges. The regulatory response will determine the future landscape of life insurance in India.