Selling more to customers should normally bring you more profits Sometimes, the return of goods sold can also bring in some revenue and contribute to profits!
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This has happened for the life insurance industry in India.
Insurance companies collect a fee, called surrender charges’, when a policy-holder wants to drop out before the expiry of his policy term.
Till two years ago, many companies charged as high as 90 per cent of the fund value for unit-linked insurance policies if a policy was surrendered within two years. This often contributed a significant chunk of income to many top insurance companies.
Since then, the Insurance Regulatory and Development Authority (IRDA) has cracked down on this practice and has fixed a cap on such charges.
It brought in a cap both in absolute and percentage terms.
MIXED TRENDS
The maximum surrender charges for policies over Rs 25,000 were capped at 6 per cent or Rs 6,000, if the policy was surrendered within one year and 2 per cent or Rs 2,000 if it was surrendered in the fourth year This is expected to have a salutary effect on such earnings of insurance companies.
The trends in such charges are still mixed based on the data available for a few companies from the last fiscal Among the top companies in the private sector, ICICI Prudential Life and SBI Life showed a rise in such charges during the last fiscal whereas HDFC Standard Life saw a decline in that period.
However, surrender charges, seen as a proportion of profits (see Table) seem significant even in the recent fiscal.
NOT HEALTHY
From the regulator’s perspective, high surrender charges are not a healthy sign. While expressing concern, Mr J. Hari Narayan, Chairman, IRDA told, Higher surrender charges show that there is a problem.
With our latest norms, there will be little scope for higher surrender charges. From next year, onwards, I am sure they will not be to the tune of what they are now.
http://www.thehindubusinessline.com/industry-and-economy/banking/article3462826.ece
