The Insurance Regulatory and Development Authority of India (IRDAI) recently found itself walking a tightrope between policyholders and insurers as it attempted to recalibrate ‘surrender value’ — the sum disbursed to a policyholder upon premature termination of a life insurance policy. 

The regulator’s attempt to favour policyholders by introducing a ‘threshold concept’ — in effect, lowering the surrender charges or penalty for discontinuing a policy before time — fell flat. It, instead, settled for a status quo, dropping the December 2023 draft proposal for a hike in the guaranteed surrender value (GSV) for policyholders. 

The prospect of a sharp increase in surrender value payouts threatened to strain the finances and margins of life insurers. Moreover, it could have sparked an increase in policy surrenders. The final guidelines, therefore, saw insurers heaving a sigh of relief. 

Clash of interests

Surrender value is used by policyholders to meet unforeseen expenses or avoid further payment of premiums. However, the computation of surrender value has remained a bone of contention between insurer and insured, mostly to the disadvantage of the latter. 

The IRDAI’s final regulations, branded by some as a prudent retreat, is being widely criticised as succumbing to industry pressure at the expense of policyholders. 

Consumer advocates decry the dilution of the draft regulations to the detriment of policyholders. Monika Halan, a writer focusing on personal finance and the chairperson of SEBI Investor Protection and Education Fund (IPEF), aired her views on social media platform X: “It is shocking that the insurance regulator has discarded a fairer value proposal to policyholders for early surrender. Now with first year commissions that can go up to 100% and very high surrender costs, expect to be mis-sold more and more. What is the @FinMinIndia doing?”

Those backing IRDAI’s ‘balancing act’, including legal experts and industry veterans, argue that it alleviates concerns of diminished profitability and augmented capital requirements.

Nilesh Sathe, former IRDAI member, says, “The discussion paper that was floated was itself faulty... it was not well thought out. When they realised it will badly impact the profitability of life insurance companies, and that customers will be tempted to go in for early surrender, they have almost withdrawn it.”

Offering a different take, Sakate Khaitan, founder and senior partner, Khaitan Legal Associates, says the IRDAI is right in reinstating the pre-December position as it is not the regulator’s call to tell businesses how they should be run. Instead it should focus on reducing lapses in insurance premium payments. “People need to comply with the contracts they enter into,” he says.

He believes that such compliance can be promoted through adequate incentives, especially given that high surrender values can prove to have the opposite effect. “If there is adverse incentive, it causes increased risk to the industry. If the industry suffers, everybody suffers,” he points out. 

Agreeing with Khaitan, Arvind Ramesh, partner at Vritti Law Partners, says, “It may be unfair to say that a benefit to policyholders has been taken away. The exposure draft was always intended to invite comments from stakeholders, and did not constitute binding regulations.”

Lauding the regulator’s rollback on surrender value, Alok Rungta, MD and CEO, Future Generali India Life Insurance Company, says it is in the best interests of both consumers and insurance players. “By gradually increasing surrender value payments as the policy approaches maturity, the IRDAI is ensuring that consumers stay invested unless it is necessary for them to opt out,” he says.

Delicate equilibrium

IRDAI’s back and forth on surrender value regulation reflects the need to maintain the delicate equilibrium between policyholder protection and industry exigencies. Needless to say, the regulator’s latest retraction will be seen as a lost opportunity for ushering in reforms, especially by policyholders. 

Industry players, on the other hand, are glad that the ‘surrender value’ axe did not fall on them, after all. There is more joy in store for them as they continue to laugh their way to the bank each time there is a policy surrendered.