IRDAI has proposed new rules to protect policyholders’ interests under which insurance companies will have to substantially increase the amount they pay to customers who choose to discontinue their scheme early in the term.
Insurers have a tough choice to make – lower sales or lower profits – to tackle premature closure of policies. If insurers create room for higher payouts by cutting commissions, it could affect sales, and if they retain commission or pay higher, they will lose on profits. As a result, shares of listed private life insurers fell – HDFC Life was down 1.9%, while ICICI Prudential Life dropped 1.8%.
The regulator has not prescribed the threshold value but, in an illustration, indicated that the surrender value would have to go up nearly 1.8 times than the current level in the second year and 0.8 higher in the fifth year.
According to sources, the objectives behind this move are to curb mis-selling by forcing insurers to spread out commissions that are currently bunched in the first year and to ensure that insurers do their best to increase persistency.
