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Life insurance companies have reported 75-400 basis points (bps) margin compressions on a year-on-year (y-o-y) basis during the quarter ended December 2024. This is largely reflective of the product mix changes in favour of unit linked insurance plans (ULIPs) over non-participating policies, and the impact of the new surrender value norms.
While the impact of the new surrender value guidelines on business and margins were large concerns, life companies have implemented this smoothly, said a report by Kotak Institutional Equities. Insurance regulator Irdai had asked insurance companies to offer a higher special surrender value (SSV) for traditional endowment policies from October 1, 2024. This is expected to provide greater flexibility and liquidity for life insurance customers who want to switch policies or discontinue them.
Irdai had said in a circular that every policy offered by a life insurer under a non-linked platform, which has acquired a surrender value, should not lapse by reason of non-payment of further premiums. It should be kept in force to the extent of paid-up sum assured, calculated by means of a formula as approved by the Authority and the reversionary bonuses or the guaranteed additions, if any, that have already been attached to the policy, Irdai said. This means policyholders will get a higher refund amount for discontinued policies, as per the new calculation approved by the regulator.
Surrender value is the amount which the policyholder receives if she stops paying premiums. Insurance companies were paying only a small amount as surrender value towards discontinued policies. Product and commission structures are likely to witness significant changes, leading to volatile premium movement in the second half of the current fiscal. However, since these changes are anticipated to be favourable for customers, the growth is likely to rise over the medium term.
Insurers had asked Irdai to revise the surrender value regulations and extend the deadline to comply with the norms. However, no change was announced. Hitherto, policyholders received less or no payout if they discontinue paying premiums.
According to Life Insurance Council data, life insurers reported a 7.78 per cent growth in premium mobilisation at Rs 3,05,912 crore during the 10-month period ended January 2025. The Life insurance Corporation of India (LIC), India’s largest life insurer, showed a 4.76 per cent growth in premium collection at Rs 1,74,248 crore during the 10-month period.
Margins are likely to be close to bottom due to the expectation of a reduction in ULIPs next year, reflecting shifting customer preferences. “Seasonal trends suggest higher sequential margins in Q4, reflecting higher volumes… overall strong business momentum may provide some operating leverage benefits as well,” the Kotak report said.
Select insurance companies had earlier projected an impact of 30-100 bps versus higher impact expected/guided earnings.
According to an insurance company, new surrender guidelines accounted for a 100-bps y-o-y compression in margins and the rest is due to a shift in product mix (ULIPs’ share rose up to 45 per cent from 33 per cent in Q3FY24).
“New surrender values for key products are lower than our initial estimates. Payout structures have been revised to introduce claw backs or deferrals. IRRs (Internal Rates of Return) are revised downward, which mostly coincided with falling yields,” the Kotak report said. Almost all insurers have implemented this in a synchronised manner, leaving little relative advantage for anyone. The distributor community also seems to have absorbed the new structure as the new normal.
