After raising the hopes of policyholders through a consultation paper in December 2023, India’s insurance regulator has left surrender charges for endowment insurance plans untouched. The paper suggested significantly reducing the punitive charges. This is a big setback for policyholders, who have often been mis-sold endowment insurance policies. Mis-selling is rampant in the insurance industry, and lower surrender charges would have helped curb the practice. However, the regulator seems to be more considerate about the interest of insurance companies than of policyholders.
The Insurance Regulatory and Development Authority of India (IRDAI) had proposed last December that there would be a premium threshold for each product and no surrender charges imposed on the balance of premiums beyond such thresholds, irrespective of the surrender timing. If implemented, it would have brought down surrender charges for traditional insurance policies by a third or a fourth, depending on the threshold value. This could have significantly impacted the revenues of life insurance companies, which have significant exposure to such plans.
At present, the surrender value is calculated as a percentage or surrender value factor of the total premium paid. A traditional insurance or non-participating policy acquires a surrender value from the third year. The surrender value factor in the third year is 30 percent, in the 4th-7th years is 50 percent, and for the last two years is 90 percent. So, if a policyholder surrenders her policy after paying, say, Rs 1 lakh premium annually for three years, she would get back only Rs 90,000 as the surrender value against her total investment of Rs 3 lakh.
By maintaining the status quo on the issue, the IRDAI has done policyholders a disservice. The persistency ratio of insurance companies shows almost half the policyholders surrender their policies by the end of the fifth year; over a quarter of policies are surrendered by the end of three years. Such a low persistency ratio is a fallout of mis-selling, which continues to be rampant in the industry because of low financial literacy and last-minute decisions taken to buy policies for tax-saving purposes. The regulator had a great opportunity to curb this by making exits less punitive for policyholders. However, it seems to have had the interest of insurance companies at the top.