IRDA recently has capped surrender charges at 12.5% for the first year, followed by 10%, 7.5%, 5% and 2.5% over the next four years and nil surrender charges from the fifth year onwards. Currently insurance companies charge anywhere between 70% to 90% in the first year. The steep reduction in surrender charges is likely to affect new business margins significantly.
There is indeed going to be a one time drop in volumes as the industry tries to realign to the changes that are taking place. However, we believe long-term drivers are intact and insurance still continues to be largely underpenetrated and with the expansion of middle class and a young workforce, we see that long-term growth prospects continue to be healthy.
There is likely to be a hit to new business margins due to all the revised charge structures. However the focus going ahead is on two important things.
Focus on changing product mix: The industry increasingly will move towards traditional products. Agents will have to be retrained and reoriented to sell traditional products going ahead. Distribution channels to be restructured: The objective is to rationalise distribution costs and the focus will be to improve agent productivity.
