Higher surrender value key overhang on insurance stocks, brokerages eye clarity

Surrender value is the total payout that an insurance company gives the policyholder in case of pre-mature discontinuation of policies. Surrender charge is what the insurer charges from the policyholder

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Insurance regulator IRDAI’s proposal to increase the surrender value on non-linked savings insurance products will affect companies’ margins and is a key overhang on stocks, brokerages have said. As per Jefferies, HDFC Life and Max Life could see maximum impact if the proposal is implemented.

Surrender value is the money that an insurance company pays to the policyholder in case of pre-mature discontinuation of policies. Surrender charge is what the insurer charges from the policyholder.

Non-linked savings products are those that are not linked to the stock market, so they provide low-risk returns and a well-defined maturity amount. Usually, surrender charges are higher for these products than market-linked products or unit-linked insurance plans, better known as ULIPs.

Also Read: HDFC Life, Max Financial shares fall on IRDAI proposal of higher surrender value

Current practice

Currently, in case of pre-mature surrender of non-linked policies, charges are levied based on value of premium received and is in range of 10-70 percent, Jefferies said.

“Charges are high if policy is surrendered soon and lower when surrendered after five years,” the brokerage said.

New practice

The Insurance Regulatory and Development Authority (IRDAI) has proposed a threshold level of premium for different products, beyond which an insurer will not be able to levy surrender charges and the premium will have to be returned to the policyholder.

Also Read: M&M Finance gains 2% on plans to enter life, general insurance space

Analysts’ views

According to domestic broking firm Motilal Oswal, the draft does not mention any threshold levels, so it is difficult to estimate the exact impact of the move. However, it could mean more customers will now invest comfortably in these products, but persistency could be under pressure.

To offset the impact, insurers might introduce a commission structure that rewards the distributors who can get the policyholders to hold on to policies for longer, ie better persistency, Motilal Oswal added.

The new calculation method could take surrender values higher by 10 percent to about 2x, CLSA said. “We foresee a drag on margins but the extent of the drag will vary from insurer to insurer,” it said.

As per Jefferies, non-linked savings products form 40-45 percent of total premiums in FY24, for the stocks under its coverage.

“The share of this segment is higher for Max Life and HDFC Life, whereas it is lower for SBI Life. A 10 percent lower profitability from this segment can impact our FY24 earnings estimate by four-six percent,” it said.

It remains to be seen if the changes are implemented retrospectively. In that case, embedded values of life insurers will also have to be revised downwards, analysts said.

At 12.20 pm, HDFC Life was quoting at Rs 669.5, down 2.19 percent from previous close. ICICI Pru Life was quoting at Rs 517.60, down 2.7 percent and SBI Life was down 1.3 percent at Rs 1450.

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