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The Insurance Regulatory and Development Authority of India (IRDAI) has revised the surrender value (SV) norms for life insurance policies, potentially impacting the profitability of insurance companies. The new regulations mandate higher payouts for policyholders opting for premature exits, potentially reducing insurers' margins.
According to analysts, the four insurance stocks likely to be most affected are Max Life, HDFC Life, ICICI Prudential Life, and SBI Life. Brokerage firm Jefferies anticipates a higher impact on Max Life and HDFC Life, while ICICI Prudential Life and SBI Life may face lower repercussions.
Overall, brokerages expressed mixed but cautiously optimistic views on the new surrender value norms. While the regulations are seen as reducing insurers' margins, analysts believe that the overall impact, though negative, will likely be manageable through strategic adjustments by the insurers.
Jefferies notes that the new SV norms are consistent with the draft regulations and will take effect from October 2024. The firm highlights that life insurers with a higher proportion of non-participating (non-par) and participating (par) savings products, as well as those with lower policy persistency rates, will be more significantly affected.
They estimate that higher SVs could reduce the gross margins of impacted products by 6-8 percentage points. However, Jefferies believes that insurers can mitigate the net impact to 40-120 basis points through measures such as deferral or clawback of commissions and reducing commission rates.
Overall, Jefferies suggests that the manageable impact could alleviate concerns and potentially support a rerating of the sector. Morgan Stanley's analysis aligns with Jefferies in acknowledging the negative implications of the revised SV norms on insurers' margins.
The firm emphasises that insurers will need to adopt measures to counteract the potential margin compression. The new regulations will require insurers to increase the special surrender value to at least the present value of the paid-up sum assured and paid-up future benefits. This shift is designed to ensure fairer compensation for policyholders exiting early, due to reasons like financial difficulties or realisation of mis-selling.
Source: Four insurance stocks that may be hit the most by new surrender value norms