Insurers say GSV norms will kill traditional plans

Life insurers have started voicing their concern on the guaranteed surrender value (GSV) norms proposed by the Insurance Regulatory and Development Authority (Irda) for traditional plans. 

Surrender value is what the policyholder gets if he chooses to terminate the policy or stops paying the premium before the term ends.

Currently, traditional plans have a lock-in period of three years. For surrenders after three years of policy initiation, the surrender value is 30% of the premium paid till that date, excluding the first year premium.

In its first draft on product design, circulated in June this year, Irda had suggested that all traditional policies shall acquire a GSV even before three years but had not spelt out the term. 

In the revised draft, which was made public a week ago, the regulator has proposed that an insurer should repay the full premium paid by a customer if he surrenders a policy in the seventh year or thereafter. For surrenders in the second and third years, a policyholder will get back 50% of the premium paid; the payout will be 75% in the fourth year and 90% between the fifth and seventh years.

“This is an unfair move from the regulator as policyholders completing the term will get a lower benefit compared to those who terminate in the middle of the policy tenure,” said an industry official, unwilling to be named.

Others see the relaxation defeating the very purpose of having a traditional policy and leading to more policy terminations. Looking through their eyes, a low surrender value acts as a disincentive for premature policy terminations.

“Policyholders will be inclined to exit if the regulator goes ahead with the proposed norms on GSV. Industry has approached the regulator and expressed concerns on the same. We are optimistic of getting it changed and have given the required suggestions on the norms,” said a senior official from the industry, requesting anonymity. 

An actuary from a reputed private company concurred, saying, “The revised norms are likely to restrict the design of traditional life insurance plans.” 

The industry also sees the proposed changes altering the cost structure of the product, pushing up the premiums for traditional plans. 

“If these norms get finalised, insurers have to change the cost structure of the product, other margins and adopt more effective customer retention policies,” said one of the industry officials quoted earlier.

To be sure, the Irda draft has said nothing on the surrender penalties of 6-8% charged by unit linked insurance plans. Ulips acquire GSV in the very first year and after the fifth year, a customer can get the full fund value in case of surrender.