While all insurers will need to tweak their product offerings to comply with the new rules, insurers are trying to maintain margins at existing levels.
HDFC Life is restructuring distribution payouts with deferrals and clawback provisions to address early surrender impacts. ICICI Prudential Life is focusing on trail-based commission following its ULIP (unit-linked insurance plan) product structure, while SBI Life is maintaining its current commission structure and expects the current ULIP-heavy product mix to minimise margin impact.
Apart from first-year surrender, the new rules allow the discount rate for calculating paid-up values to be up to 50 basis points above the benchmark 10-year government securities yield. Currently, it is the same as the benchmark yield.
Despite the regulatory changes, insurers are confident of sustaining growth and protecting margins through these steps. HDFC Life is restructuring its distribution payouts with deferrals and clawback provisions to mitigate early surrender impacts, the company’s management said during the earnings call. The company has talked about a gross impact of approximately 100 bps on the value of new business (VNB) margin due to higher surrender value payables on early exits.ICICI Prudential Life Insurance is looking to replicate the experience of ULIP products, where it has moved to a trail-based commission structure. Also, the insurer sees a limited impact on VNB margins due to its relatively lower exposure to non-linked products.
SBI Life is opting not to alter its commission structure for distributors, having already factored in higher surrender values in its assumptions, wrote Avinash Singh of Emkay in a report. As the lowest-cost operator with a ULIP-heavy product mix, the company believes its margins will be least affected by the new surrender regulations. The management expects minimal impact on the VNB margin and remains optimistic about maintaining 18-20% annualised premium equivalent (APE) growth guidance and 28% margins, despite the regulatory changes.
Suresh Ganapathy, head of financial services research at Macquarie Capital, is sceptical about insurers’ ability to maintain current margin levels and has said that they are underestimating competition and regulation. “Margins are down across the board, and I’m surprised to see management being sanguine… Here weak protection growth is baffling,” he wrote.