Life Insurers See Margin Compression Amidst Regulatory Changes
Life insurance companies in India are facing margin pressures, with reported compressions of 75-400 basis points (bps) year-on-year during the quarter ending December 2024. This is largely due to the increasing popularity of unit-linked insurance plans (ULIPs) compared to traditional non-participating policies, combined with the effects of new surrender value regulations.
Life insurance companies are navigating regulatory changes and shifting market preferences.
The Insurance Regulatory and Development Authority of India (Irdai) introduced new guidelines impacting the surrender value of policies. These changes, which aimed to provide greater flexibility and liquidity for customers, have had a noticeable effect on the industry.
Surrender Value Norms
Irdai mandated that every policy under a non-linked platform with a surrender value must remain in force even if premiums are not paid. This is maintained to the extent of the paid-up sum assured, alongside any already attached reversionary bonuses or guaranteed additions. This change means that policyholders will now receive a higher refund amount for discontinued policies.
The new regulations, which took effect on October 1, 2024, required insurers to offer a higher special surrender value (SSV) for traditional endowment policies. While concerns were raised about the impact on business and margins, the implementation has been smooth, according to a report by Kotak Institutional Equities.
Previously, policyholders often received little or no payout when they stopped paying premiums. The surrender value is the amount a policyholder receives when they discontinue premium payments.
Market and Product Shifts
The shift towards ULIPs has also influenced the financial landscape. Product and commission structures are likely to experience significant changes, which could lead to fluctuations in premium movement in the second half of the fiscal year. Despite this, growth is expected to increase over the medium term, as these changes are anticipated to be beneficial for customers.
According to Life Insurance Council data, life insurers reported a 7.78 per cent growth in premium collection, totaling Rs 3,05,912 crore, during the 10-month period ending January 2025. The Life Insurance Corporation of India (LIC), the largest life insurer in India, experienced a 4.76 per cent growth in premium collection, with a total of Rs 1,74,248 crore for the same period.
Outlook
Margins are believed to be near their low point due to anticipated reductions in ULIPs next year, which would reflect changing customer preferences. The Kotak report stated, “Seasonal trends suggest higher sequential margins in Q4, reflecting higher volumes… overall strong business momentum may provide some operating leverage benefits as well.”
Some insurers had previously predicted an impact of 30-100 bps, contrasting with the higher impact that was expected/guided for earnings. One insurance company noted that the new surrender guidelines resulted in a 100-bps year-on-year compression in margins, with the remaining impact coming from a shift in product mix, where ULIPs’ share increased to 45 percent from 33 percent in the third quarter of fiscal year 2024.
The Kotak report further noted, “New surrender values for key products are lower than our initial estimates. Payout structures have been revised to introduce claw backs or deferrals. IRRs (Internal Rates of Return) are revised downward, which mostly coincided with falling yields.”
Implementation of these changes has been broadly synchronized across the industry, which has left little competitive advantage for individual insurers. Furthermore, the distributor community appears to have effectively adjusted to the new regulations.
