Life Insurance Sector Check - Navigating The Changes In Surrender Charges: Motilal Oswal

Motilal Oswal Report

New surrender charges were implemented from October 01, 2024, wherein key changes were:

1. implementation of charges from the first year itself (earlier it was effective from the second year),

2. a revision in the formula for guaranteed surrender value defined by the regulator, and

3. the discounting rate for calculation of surrender value has been linked to the 10-year G-Sec yield.

These changes are likely to impact value of new business margins for listed companies in varied proportions based on their product mix (share of non-linked business), persistency assumptions in VNB calculations, and actual persistency. HDFC Life Insurance Company Ltd./SBI Life Insurance Company Ltd./Max Financial Services Ltd. have indicated 100/50/100-200 bps impact, while Life Insurance Corporation of India/ICICI Prudential Life Insurance Company Ltd. have cited minimal impact.

To counter the impact, some corrections have been made in commissions –

1. LIC has lowered upfront commissions and raised commissions in future years, and

2. private players have altered commission structures based on agent cohorts in terms of premium size and persistency.

Further, the IRRs in the non-par segment over the past three months have been reduced by ~15-43 basis points to pass on some impact to the customers. During this period, the 10-year G-Sec yield has declined by just 15bp.

With insurance as a savings product becoming more liquid and agents needing to increase their business to meet their club membership targets (based on commissions), the ticket sizes are expected to increase.

With all the noise and media reports surrounding the bancassurance channel, which the regulator is considering in relation to the parent bank's share in the overall bancassurance distribution of an insurance company, we believe that companies with a higher proportion of non-bancassurance channels in their distribution mix will outperform. ICICI Prudential and LIC have a significantly higher share of the non-bancassurance channel.

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