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Life insurers could change their product mix according to new surrender value standards | Insurance

Life insurers could change their product mix according to new surrender value standards | Insurance

The life insurance industry, which had been aiming to increase its share of non-par products in the overall product mix, is likely to change its strategy after the decline in FY24 to mitigate the impact of the revised surrender value norms.

A change in surrender value standards is likely to dampen the growth of non-par products and encourage product design and innovation in the life insurance industry.

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A non-paribus product offers the customer guaranteed benefits based on predetermined choices.

“The industry can mitigate the impact of the revised surrender value norms in several ways. As a result of the norms, the share of non-risky products is likely to decrease or the production of combination products will increase. The changes can also encourage product innovation in the industry,” said an insurance official.

In FY2024, the product mix of life insurance companies shifted towards unit-linked insurance plans (Ulips) due to buoyant equity markets. This shift impacted the value of new business (VNB) margin of life insurers due to the lower product margin of the segment.

During the post-earnings call, all listed life insurers, including Life Insurance Corporation of India (LIC), talked about focusing on non-par products and increasing their share in the overall product mix. This will help improve profit margins.

The Insurance Regulatory and Development Authority of India (Irdai) has prescribed an increased special surrender value (SSV) in its circular on life insurance products dated June 12.

The circular will enter into force on 30 September 2024.

According to the circular, life insurers must ensure that the SSV corresponds at least to the expected present value of the sum insured paid in, the future benefits paid in and the acquired or vested rights, taking appropriate account of survival benefits already paid out.

In addition, the surrender value is applicable after the first year if the annual premium for the first year has been paid.

“The growth of non-par products is likely to slow down, but this is not only due to the revised norms but also the buoyant stock market,” said another insurance official.

However, analysts do not expect a shift from non-par products to participating products (par) as the former has a better profit margin. There is a likelihood of a change in product design.

“Insurers could change their product mix. However, since non-par products have higher margins, insurers could change their product mix from within. They could either redesign their products or sell longer maturity products as these are discounted to the 10-year government bond. Even if the yield profile is a little lower, the companies could maintain profitability,” said Madhukar Ladha, director of equity research at Nuvama Institutional Equities.

Under the guidelines, benefits will be discounted at 10-year government bond rates, with an additional buffer of 50 basis points (bps) compared to the proposal to discount them at 10-year government bond rates.

Aside from profit margin, analysts expect that dealers’ push into non-par products before October 2024 is likely to improve their sales.

“After the tax change in the last budget (Union Budget FY24), the share of non-parity products has already come down from the previous year. From this base, there will be a strong push by traders for the existing (non-parity) products in the next 2-3 months, if at all.

So in the short term, there could be higher growth in the non-par segment. But even after that, given the flexibility given to the customers, there is a possibility that growth in this segment may pick up as it becomes more flexible for the customers. So, I don’t see any slowdown in the non-par segment,” said Avinash Singh, senior research analyst at Emkay Global Financial Services.