Life insurance stocks showed stability on June 13 despite the Insurance Regulatory and Development Authority of India (IRDAI) introducing new rules for surrender value (SV). Previously, policyholders could only receive a surrender value from the second or third year of their policy. Now, they can receive it from the first year. This change is expected to initially reduce profit margins for insurance companies, but they are expected to adjust over time.

Key life insurance stocks like LIC, HDFC Life, ICICI Prudential, Max Financial Services, ICICI Lombard, and General Insurance Corporation saw gains of up to 2 percent, which was better than the Nifty 50 index’s 0.3 percent increase.

Analysts from Morgan Stanley noted that the new SV rules, though initially challenging compared to earlier proposals, are manageable. They mentioned that insurers are expected to take steps to minimize the negative impact on the value of new business (VNB) margins but are waiting for more details.

Jefferies, another brokerage firm, also believes the impact on margins is manageable. They suggest that these changes could eventually help in re-evaluating life insurance companies positively. They expect that the impact will be more significant for companies like Max Life and HDFC Life and less for ICICI Prudential and SBI Life. Jefferies mentioned that insurers could limit the net impact on margins to 40-120 basis points by adjusting commissions, rates, or using deferral or clawback strategies.

In simple terms, surrender value is the amount paid to a policyholder who ends their policy before it matures. Before the new rules, no payout was made if a policy was surrendered in the first year. Benefits, which were 30 percent of total premiums, started from the second year. The new rules now introduce these benefits from the first year itself. Additionally, insurers must ensure that the payout equals at least the total promised value, including any already paid benefits.

Kotak Institutional Equities believes that the final guidelines are slightly better than last month’s draft. They estimate a 55-70 percent decline in surrender income, which is better than the previously estimated 70-80 percent decline. They suggest adjusting distributor payouts or internal rates of return (IRRs) to mitigate the impact on margins.

Kotak analysts did not fully analyze the impact of these new rules but anticipate that the decline in surrender income will affect the margins of insurance companies. The insurance business involves companies, distributors, and policyholders, all of whom share the impact of such rule changes. While policyholders benefit from early surrender value, companies bear most of the burden. However, insurance companies might share some of this burden with distributors and ongoing policyholders by lowering returns to help offset the margin impacts, according to Kotak analysts.

In summary, the new IRDAI rules require insurance companies to offer surrender value from the first year. This change is expected to reduce profit margins initially but is manageable. Insurance companies are expected to adapt by adjusting their business strategies. The change benefits policyholders by providing earlier access to surrender value, but it poses challenges for insurers, who may need to share some of the financial burden with distributors and ongoing policyholders. Despite these challenges, life insurance stocks showed stability and even gains, indicating investor confidence in the sector's ability to adapt and thrive under the new regulations.

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