Life insurance stocks on the run: HDFC Life, Max Financial, ICICI Pru gain up to 7% after IRDAI retains surrender value limits

Shares of life insurance companies were on the rise today, after the Insurance Regulatory and Development Authority of India (IRDAI) retained the surrender value limits in the final guidelines released last week. After this announcement, HDFC Life Insurance, Max Financial Services, Life Insurance Corporation of India (LIC) and ICICI Prudential Life rose up to 7%.

Shares of Max Financial Services Ltd (MFSL), the joint venture partner in Max Life Insurance, jumped nearly 7% to hit a high of ₹1,010 on the NSE in early deals. HDFC Life Insurance share price jumped up to 3% to hit a high of ₹642.80 on the NSE.

LIC shares gained more than 1% to hit a high of ₹918 per piece on the NSE, while SBI Life Insurance gained over 0.5% in early trade but failed to hold onto gains due to selling pressure. The stock later dropped nearly 3% to hit a low of ₹1,457 apiece.

Final IRDAI guidelines retain surrender value limits

The Insurance Regulatory and Development Authority of India (IRDAI) retained the surrender value limits on non-linked products in its final guidelines, which will be effective April 1, 2024.

In simple terms, the surrender value is the amount paid by the insurer to a policyholder upon premature closure of a life insurance policy before the maturity date. The insurer also levies a surrender charge for early closure of the policy and it varies from plan to plan. An increase in surrender value leads to higher outflow for the insurer and impacts margins and profitability.

The development was a relief for life insurance companies mainly Max Life and HDFC Life Insurance, which could have seen a larger impact on margins because of relatively higher dependence on non-linked products.

IRDAI, in its draft regulations, had proposed a hike in the surrender values on non-linked products and suggested that the surrender charges be imposed only up to a threshold limit of premium. It proposed that no surrender charges should be levied if premiums paid are beyond the threshold limit. Surrender charges will be applicable only if a policyholder surrenders the product within three years of the policy term.

New guidelines brings major relief for insurance companies

Upon the release of IRDAI’s draft norms in December 2023, life insurance stocks saw a major decline as the proposed draft regulation could have resulted in an impact of 300-500 basis points on insurers' value of new business (VNB) margins. However the status quo maintained in the final draft is a big relief for life insurers. The life insurance sector is largely impacted by regulatory changes and personal taxation rule changes by the government and tax authorities.