Life insurers’ stocks rally on ‘low impact’ of new norms

Mumbai: Shares of life insurance companies rallied after the regulator announced new norms requiring them to provide higher surrender value than what they have been paying out. The relief rally was triggered by realization that the impact on margins would be far less than estimated because insurers front-end most of their costs into the first year which has been excluded from surrender value norms.
Shares of HDFC Life, SBI Life, ICICI Pru Life, Max Financial and Life Insurance Corporation have all rallied in the last two days after the new norms.
The shares of life insurance companies have been under pressure since December 2023, when the insurance regulator first proposed increasing surrender charges. The product regulations in March 2024, however, did not alter the guaranteed surrender values. The situation changed again on May 30, when the regulator introduced a fresh draft that included the regulation of special surrender value. This new development was perceived to have an impact on new business margins of up to 3-4%.
On June 12, the regulations were officially announced by Irdai. The first year was excluded from SSV norms, a move that could have hurt margins. Additionally, insurers were granted the flexibility to discount returns at a higher rate of 50 basis points over the government securities yield, as opposed to the previous benchmark of the 10-year G-sec yield. According to a report by JM Financial, insurers can mitigate the pressure on margins by passing on the potential loss to intermediaries or the customer.
The second option is to offer a slightly lower return on non-participating products where insurers have no competition on providing guaranteed returns.