Life insurance companies may seek more time from the regulator IRDAI to evaluate the proposed modification to the surrender value of non-linked life insurance policies.

Insurers are worried an increase in the surrender value will impact their margins in case of non-participating policies and discourage persistency.

However, the increase in surrender value is expected to encourage more uninsured individuals to opt for long-term policies.

Earlier this month, IRDAI came out with an exposure draft on a more encompassing product regulation. It seeks to repeal six regulations following recommendations of the regulation review committee. Comments were sought till January 3, 2023, which may see an extension.

A key change is the rules on surrender value: the amount payable on the withdrawal or termination of a policy during the term.

The regulator has proposed the creation of a premium threshold for each product, which sources said lacks definition and clarity.

“There shall not be any surrender charges imposed on the balance of premiums beyond such threshold limits, irrespective of the time of surrender,” the draft regulations said.

“The proposed changes in the surrender charges are looking to eliminate any surrender penalty above the threshold premium, which means a material and increasing change in the surrender value for higher ticket policies with increased premium," Emkay Research said.

"The proposal is still in the draft stage, to be applied prospectively, and there is no clarity on threshold premium, making it extremely difficult to gauge the extent of the impact on individual life insurers.”

There is however an initial understanding that the higher surrender value payout could impact the value of new business margins.

While proposing the changes, the regulator has said the surrender value shall be fair and reasonable to the policyholders and shall be close to the expected maturity value towards the end of the term.

But there is a flip side. “The accidental outcome of the proposal by the regulator, to improve policyholders’ friendly aspect, is an indirect nudge or encouragement towards surrenders – and this goes against the philosophy of positioning life insurance as the long-term savings and protection product,” Emkay said.