Since October 2009, the Insurance Regulatory and Development Authority (IRDA) has focused on rationalising charges, bringing broader uniformity in product features and improving disclosures. After capping charges, fixing minimum policy terms and making it compulsory to offer sum assured on products, IRDA now proposes to cap surrender charges at 15% of fund value for 10-year policies and 12.5% for >10-year policies, declining to 0% in a stepped manner by the sixth policy year - lower than the existing levels. As per our interpretation, these guidelines will apply to new business only (including the existing products, but not the existing in-force business).
The biggest risk comes from the policyholder behaviour in response to drop in surrender charges; due to lower penalty, persistency across sector may
drop, hitting margins adversely.
Eliminating pitfalls in the treatment of lapsed funds, IRDA proposed four options for policyholders: (1) revival; (2) continuation to the extent of risk
cover; (3) continuation of risk cover and remaining invested in a fund (paying risk charges and FMC; this option is also set as default option); and (4) withdrawal.
All these will lead to drop in Margins for Insurance Companies.
