Irdai drops plan to ease insurance surrender fees

Mumbai: In a relief for life insurance company investors, regulator Irdai has retained most existing surrender charges in the revised product regulations. However, policyholders who cancel their policies will not get as much as what was proposed under the draft exposure norms, which were aimed at curbing mis-selling in Dec 2023.
Life insurance companies‘ stocks had taken a major knock after Irdai had released the draft norms. The industry, including public and private sector companies, had lobbied with the regulator, stating that the proposed norms would hurt growth. Under the new norms, boards have the responsibility of ensuring fair pricing.
“As far as the surrender charges go, the status quo (pre-exposure draft) has been largely been maintained. There has been a revision of the special surrender charges which benefit the policyholder to the extent of 10-15%,” said an industry source. The source added that the benefit would be to policyholders who surrender their policies after five years.
In the draft, the regulator had sought to cap the maximum surrender charges that would be borne by a policyholder for exiting a policy prematurely. Higher surrender charges were expected to curb mis-selling as insurance companies would lose money if a policy was discontinued. This would force them to claw back commissions from distributors who would, in turn, sell only to those who had the capacity to pay.
Insurance companies had, however, argued that life insurance policies are long-term and the biggest buyers of long-dated govt securities with a duration of up to 40 years. The new norms would force them to remain liquid or liquidate long-term securities, which would be detrimental to all stakeholders.
The surrender charges on insurance policies vary based on the policy year and the annualised premium. For policies with an annual premium up to Rs 50,000, the maximum discontinuance charge is determined as a percentage of the yearly premium or fund value, whichever is lower.

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