HDFC Life, LIC, Other Insurance Stocks Slide

Insurance stocks such as LIC, HDFC Life, SBI Life, ICICI Prudential Life, and ICICI Lombard experienced a decline of up to 1% on May 30. This downturn followed reports indicating that the Insurance Regulatory and Development Authority of India (IRDAI) might revisit its March proposal to increase the surrender value for insurance policies.

Sources cited by CNBC-TV18 indicate that the IRDAI may mandate insurers to provide a higher guaranteed value or special surrender value when policies are voluntarily terminated. This development comes after the insurance regulator decided not to alter the surrender value in March 2024.

In simple terms, the surrender value is the amount an insurance company pays to the policyholder if they decide to terminate the plan before it reaches maturity. When a policyholder chooses to surrender a policy, the insurance company calculates this value based on factors such as the number of premiums paid, the duration of the policy, and other relevant criteria.

At present, if a policy is surrendered in the first year, the insurance company does not pay any amount. However, if the policy is surrendered in the second year, the insurance company pays 30% of the total premiums to the policyholder. If surrendered in the third year, the payout is 35%. For surrenders between the fourth and seventh years, the company pays 50% of the total premiums, and if the policy is surrendered during the last two years, the payout increases to 90%.

The latest proposal suggests that insurers would be required to pay both a higher guaranteed value and a special surrender value. The guaranteed value is the minimum amount an insurance company must pay a policyholder, while the special surrender value is typically higher than the guaranteed value.

Additionally, the IRDAI may introduce a provision to offer a special surrender value starting from the first policy year. This contrasts with the current terms, where a policyholder only acquires surrender value after paying three annual premiums. Experts suggest that if the IRDAI increases the surrender value, it could affect both the profitability of insurers and the behavior of policyholders.

A report from Kotak Institutional Equities in December indicated that, although it is too early to fully assess the impact, there could be a 120-200 basis point reduction in the margins of private insurers.

In April 2024, during a meeting between the IRDAI Chairperson and the CEOs of life insurance companies, the topic of increasing the Special Surrender Value (SSV) was discussed. On April 30, 2024, CNBC-TV18 reported that the Insurance Regulator plans to raise, mandate, and calculate the SSV based on a specific formula.

In the draft proposal sent to life insurers, the IRDAI specifies that the Special Surrender Value (SSV) must be at least equal to the expected present value of the paid-up sum assured and paid-up future benefits. Furthermore, the regulator mandates that the interest rate used to calculate the expected present value of the paid-up sum assured should not exceed the rate for 10-year Government securities.
In December 2023, the IRDAI proposed increasing the Guaranteed Surrender Value (GSV) to more than twice its existing value. This proposal faced strong resistance from life insurers. However, in March 2024, the IRDAI decided to keep the GSV at its current levels, which was a significant relief for life insurers. Then, in May 2024, the IRDAI proposed a framework to increase the Special Surrender Value (SSV) and required insurers to submit their feedback on this proposed increase by May 31.