Dropping out of insurance policy? It’s set to pinch less

Mumbai: If you realise that you have been a victim of mis-selling by an insurance agent, and wish to surrender your policy, you are unlikely to lose out a major portion of the premium paid.

Irdai has proposed new rules to protect policyholders’ interests under which insurance companies will have to substantially increase the amount they pay to customers who choose to discontinue their scheme early in the term.

Insurers have a tough choice to make — lower sales or lower profits — to tackle premature closure of policies. If insurers create room for higher payouts by cutting commissions, it could affect sales, and if they retain commission or pay higher, they will lose on profits. As a result, shares of listed private life insurers fell on Thursday — HDFC Life was down 1.9%, while ICICI Prudential Life dropped 1.8%.


The regulator has not prescribed the threshold value but, in an illustration, indicated that the surrender value would have to go up nearly 1.8 times than the current level in the second year and 0.8 higher in the fifth year.

According to sources, the objectives behind this move are to curb mis-selling by forcing insurers to spread out commissions that are currently bunched in the first year and to ensure that insurers do their best to increase persistency.

The new rules are a part of Irdai’s proposed insurance product regulations, a draft of which was circulated to insurers. “There will be a premium threshold defined for each product, where there shall not be any surrender charges imposed on the balance of the premiums beyond such threshold limits, irrespective of the timing of the surrender,” the draft circular said.

The insurance regulator has proposed a threshold for the surrender charges they deduct from policies that are closed early. The proposed threshold is much lower than many companies deduct from insurance policies.

Companies deduct a surrender charge because they book upfront all their costs of selling a policy. For instance, there are cases when 75% of the first-year premium goes towards various costs most of which is predominantly commissions paid to the corporate agent (usually a bank) or an individual agent.

This is not the first time that the insurance regulator is pushing insurers on surrender charges. Over a decade ago, the regulator capped the maximum amount that insurers could deduct from unit-linked insurance plans. This followed a turf war with markets regulator Sebi, which had accused insurers of selling ULIPs that mimic mutual fund plans. The cap resulted in insurance companies shifting to traditional products.