Insurance stocks such as LIC, HDFC Life, SBI Life, ICICI Prudential Life and ICICI Lombard saw declines on Thursday following reports that the Insurance Regulatory and Development Authority of India (IRDAI) might rethink its March proposal to hike the surrender value for insurance policies.

What Happened: IRDAI could mandate insurers to pay higher guaranteed or special surrender values if policies are voluntarily terminated, CNBC-TV18 reported, citing sources. This development comes after the insurance regulator decided not to alter the surrender value regulations in March 2024.

Surrender value is the amount paid by an insurance company to the policyholder when the policy is terminated before maturity. The calculation is based on the number of premiums paid, policy duration and other factors.

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Currently, no amount is paid if a policy is surrendered during the first year. In the second year, 30% of total premiums are paid, increasing to 35% in the third year. For policies surrendered between the fourth and seventh years, 50% of total premiums are paid, while 90% is paid if surrendered during the last two years.

Changes Explained: The new proposal suggests insurers might need to offer higher guaranteed values and special surrender values. The guaranteed value is the minimum amount an insurer pays, while the special surrender value is typically higher.

Additionally, IRDAI might introduce a provision requiring insurers to offer special surrender values from the first policy year, contrasting with the current rule where surrender value is acquired only after three annual premiums are paid.

Kotak Institutional Equities had highlighted in December that while it’s too early to fully assess the impact, there could be a 120-200 basis point drag on the margins of private insurers.

Price Action: Most insurers ended the session lower on Thursday. LIC lost 0.53% to end the session at ₹993. HDFC Life fell 1.77% to ₹551.9. SBI Life gave up 1.97% to end the session at ₹1,385. ICICI Prudential Life eased 0.93% to ₹551. ICICI Lombard ended the session nearly flat at ₹1,597.

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