Policyholders Prepare for the Effects on April 1st? Understand IRDAI’s New Surrender Charge Guidelines

The Insurance Regulatory and Development Authority of India, which oversees the insurance industry, has released a number of rules, one of which requires insurers to declare surrender fees up front.

Six rules are combined into one comprehensive framework by the IRDAI (Insurance Products) rules, 2024, with the goals of making it easier for insurers to do business, increasing insurance penetration, and allowing them to react quickly to changing market needs.

Effects on Policyholders

These laws go into effect on April 1, 2024, and state that if policies are surrendered within three years after purchase, the surrender value is projected to stay the same or perhaps decrease.

It said that there may be a little rise in the surrender value for plans that were turned in between the fourth and seventh years.

A guaranteed surrender value will be given for non-single premium life insurance plans following at least two years of premium payment.

When an insurance policy is cancelled before its maturity date, the insurers will pay the policyholder the surrender value. The earnings and savings component will be paid to the policyholder in the event of their surrender within the policy’s term.

Bajaj Allianz Life CEO Tarun Chugh has backed IRDAI’s well-balanced approach, stating that life insurers should not be significantly impacted by the finalized surrender value laws.

In an interview with CNBC-TV18, Chugh said that higher surrender values would have largely hurt consumers, which would have reduced Internal Rates of Returns (IRRs).

Chugh said that restrictions on changing critical illness and savings plan premiums would have different outcomes, with the latter potentially posing more difficulties.

Why did IRDAI make these changes?

These regulations, according to IRDAI, enhance the rules controlling guaranteed surrender value and special surrender value, along with disclosures of the same. They also support good governance in product design and pricing.

Additionally, it guarantees that the insurers follow good management procedures for efficient supervision and thorough investigation.

Following a thorough evaluation of the insurance industry’s regulatory structure, the IRDAI adopted eight principle-based unified rules on March 19 during its meeting.

Protecting policyholder interests, rural and social sector responsibilities, the electronic insurance marketplace, insurance products, and the operation of foreign reinsurance branches are just a few of the crucial areas covered by these regulations. Other important areas include registration, actuarial, finance, investment, and corporate governance.

This follows the first unified rule on insurers’ management expenses being announced in January 2024.

“The replacement of 34 regulations with six regulations and the introduction of two new regulations, enhancing clarity and coherence in the regulatory landscape, marks a significant milestone in regulatory governance,” the IRDAI said in a statement.

It said that in order to ensure a thorough evaluation of many views in designing the new framework, the process entailed extensive discussions with a wide range of stakeholders, including the insurance sector, specialists, and the general public.

Social Sector, Rural

According to the Insurance Act of 1938, insurers were required to comply with minimal business duties in the rural, social sector, and motor third party business. These laws were consolidated into the IRDAI (Rural, Social Sector, and Motor Third Party duties) laws, 2024.

It said that the scope of the social sector has been expanded to include cards and beneficiaries under different programs, and that compliance and measurement of these statutory requirements have been changed, with the Gram Panchayat serving as the unit of measurement under the rural obligations.

Motor Standards

According to the statement, the renewal of insurance coverage for tractors, passenger cars, and vehicles transporting goods will serve as the unit of measurement under the Motor Third Party Obligations.

Additionally, by fostering orderly growth and harmonizing the current legal and regulatory framework, the IRDAI (Registration and Operations of Foreign Reinsurers Branches & Lloyd’s India) Regulations, 2024 consolidate two regulations and aim to foster the systematic development of the reinsurance sector in India.

It said that the goal of these laws is to make reinsurance organizations’ operations more efficient.

According to the statement, the ultimate goal of these legislation is to foster an atmosphere that will support the development of the reinsurance industry in India, which will benefit insurers as well as policyholders.

Simultaneously, the IRDAI (Protection of Policyholders’ Interests and Allied Matters of Insurers) Regulations, 2024, combine eight regulations into a single, cohesive framework with a number of primary goals. These goals include making sure that prospects are treated fairly during the insurance policy solicitation and sale process and safeguarding policyholder interests throughout interactions with insurers and distribution channels.

It said that in order for insurers and distribution channels to meet their commitments to policyholders—which include grievance redressal and policyholder-centric governance—these laws emphasize the implementation of standard processes and best practices.

It also said that the restrictions are intended to encourage responsible risk management practices in relation to insurers’ outsourcing endeavors.

It said that the standards make sure insurers do business in a way that prioritizes policyholder interests whether they establish or close locations, both domestically and abroad.