Life Insurers Report Margin Squeeze Amid Regulatory Changes and Shifting Product Mix
Life insurance companies in India are grappling with margin compression, experiencing a decline of 75 to 400 basis points (bps) year-on-year (y-o-y) during the quarter ending December 2024. This downturn stems primarily from changes in product offerings, with a notable shift towards unit-linked insurance plans (ULIPs) over traditional non-participating policies, alongside the implementation of new surrender value regulations.
The life insurance sector is adapting to new regulations.
According to a report by Kotak Institutional Equities, while the new surrender value guidelines sparked significant concerns about their impact on business operations and profit margins, life insurance companies have, so far, managed the transition smoothly. The Insurance Regulatory and Development Authority of India (Irdai) mandated that insurers provide a higher special surrender value (SSV) for traditional endowment policies, effective from October 1, 2024. This is expected to improve flexibility and provide greater liquidity for policyholders.
Irdai issued a circular stipulating that policies under a non-linked platform, which have accrued a surrender value, should not lapse due to non-payment of premiums. Instead, the policies should remain in force up to the extent of the paid-up sum assured, calculated based on a formula approved by the authority, along with any reversionary bonuses or guaranteed additions. This change means policyholders will receive a larger refund upon discontinuing their policies, per the regulator’s revised calculations.
Industry Adjustments and Future Outlook
Surrender value represents the amount a policyholder receives if they stop paying premiums. Historically, insurance companies offered relatively small amounts for discontinued policies. As a result, product and commission structures are likely to undergo considerable adjustments, potentially causing premium movement fluctuations in the second half of the current fiscal year. However, these changes are expected to benefit customers, hinting at possible growth over the medium term.
Insurers had requested that Irdai revise the surrender value regulations and extend the compliance deadline, but no changes were announced. Previously, policyholders often received minimal or no payout if they ceased premium payments.
Data from the Life Insurance Council indicates that during the 10-month period ending January 2025, life insurers showed a 7.78% growth in premium mobilization, reaching Rs 3,05,912 crore. The Life Insurance Corporation of India (LIC), the leading life insurer in India, reported a 4.76% growth in premium collection, totaling Rs 1,74,248 crore for the same period.
Margins are likely to stay near the lower end due to an anticipated decrease in ULIPs next year, reflecting evolving customer preferences. “Seasonal trends suggest higher sequential margins in Q4, reflecting higher volumes… overall strong business momentum may provide some operating leverage benefits as well,” noted the Kotak report. Some insurance companies had previously predicted an impact of 30-100 bps, contrasting with higher projected earnings impacts. One insurance company reported a 100-bps y-o-y margin compression due to the new surrender guidelines, with the remainder resulting from a shift in product mix (ULIPs’ share increased to 45% from 33% during Q3FY24).
“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,” stated the Kotak report. The synchronized implementation of these changes by almost every insurer has diminished any relative competitive advantage. Furthermore, the distributor community appears to have adapted to the new structure.
