Life Insurance policies are usually surrendered in emergency situations when the policyholders need money or cannot afford the premium payment. Data of surrendered claims from the Insurers indicates that there is a fourfold increase in the number of surrendered claims in 2021-22 in the case of LIC.
A ‘Life Insurance’ policy (LIP) provides financial security to the immediate kin in case of death. It also provides financial support after the maturity of the policy. There are various LIPs offered by organizations that provide additional benefits during and post the policy period. Hence, apart from providing financial security in the aftermath of a death, a LIP also acts as a savings plan as the Income Tax act also allows for the deduction of the insurance premium up to a certain limit.
While the intent of taking an insurance policy is that it comes to rescue in case of emergency, there could be situations where-in the policyholder intends to surrender or withdraw from the policy. The reasons could include the inability to pay premiums, the requirement of money due to emergencies, the shortfall in financial resources for survival, etc. Life Insurers provide the option to surrender the policy and claim the benefits, subject to certain agreed terms & conditions.
At a macro level, trends in new policy subscriptions, and surrender act as proxy indicators of the state of the economy, especially the status of insured households. In this context, we look at the trends in ‘Surrendered’ or ‘With-drawn’ Life Insurance Policies over the last 10 years and analyse the correlation if any with various factors that could have influenced these trends.
The data is sourced from the Public Disclosures by the Life Insurance companies as available with the Insurance Regulatory and Development Authority of India (IRDAI). There are 24 Life Insurance Companies in India that are authorised to provide Life Insurance Policy services, including Life Insurance Corporation of India (LIC). For this analysis, we have considered top-10 life insurers in terms of surrendered policies.
Increase in the surrendered claims in recent years across most companies
“L-7- Benefits Paid Schedule” from the Public Disclosures of Life Insurers provides details of the benefits paid out by the companies through various policies. Apart from the benefits related to matured claims, claims on death, etc, the information also includes the benefits paid for surrendered or withdrawn policy claims.
There is a huge variance in the total value of the policies surrendered across the insurers, with few of them holding the major share in the market. Life Insurance Corporation of India (LIC) is the Public Life Insurer in the country and also the largest life insurer. This is also reflected in the quantum life insurance policies surrendered.
In 2013-14, the total value paid out by LIC for surrendered policies was Rs. 59.63 thousand crores. This reduced in the ensuing two years, followed by a year-on-year increase from 2016-17. The highest annual increase was in 2018-19 and 2021-22.
Among the Private insurers, ICICI Prudential, HDFC Standard & SBI Life are among the largest Life Insurance companies. These three insurers show varying trends over the past 10 years (2012-13 to 2021-22), but a common trend is the higher increase in the pay-out of surrendered policies in the year 2021-22.
ICICI Prudential paid out Rs. 20.4 thousand crores in 2021-22, compared to Rs. 16.2 thousand crores in 2020-21. However, unlike LIC, there was a fall during 2018-19, which broke a three-year increasing trend in the benefits paid for surrenders.
HDFC reported an exponential increase in the benefits paid from Rs. 8.86 thousand crores in 2020-21 to Rs. 13.7 thousand crores in 2021-22. In the case of SBI Life, it increased from Rs. 8.43 thousand crores to Rs.11.24 thousand crores during the same period.
A similar increase for 2021-22 is observed in most of the other insurers. India First Life, a comparatively smaller life insurer has a manifold increase in the pay-out for surrenders from Rs. 19.75 crores to Rs. 2.98 thousand crores between 2012-13 & 2021-22. Meanwhile, other Life insurers like Aviva and Reliance Nippon reported a considerable decline in the value of benefits paid out for surrenders. While these along with Bharti AXA, and Star Union Dai-Chi have had a lower surrender benefit in recent years, there is a visible increase seen during 2016-17 to the 2018-19 period.
While the trends across individual insurers vary, two specific trends were observed across most of the insurers. There is a higher increase in the value of benefits paid by the insurers post-COVID-19 pandemic i.e., after 2019-20. Prior to that, there is an increase in the surrendered benefits paid, during & post-2016-17. This could be an after-effect of Demonetisation. In the case of a few insurers, the increase is observed even prior to that, especially during 2014-15.
A fourfold increase in the number of Surrender Claims for LIC
While the value of the surrendered and withdrawn claims is influenced by various factors like the age of the policy surrendered, the value of the policy, the actual payout of the life insurer, etc, the number of claims surrendered provides a better understanding of the trend.
As was the case in the total value of benefits paid out for surrenders, there is an increase in the number of surrendered claims post the pandemic, especially in 2021-22. This is more evident in the case of LIC. While there is a considerable increase in the value of benefits paid by LIC for the surrendered claims in 2021-22, there is an exponential increase in the number of claims. In 2020-21, a total of 53.35 lakh surrendered claims were settled by LIC, which increased to 2.12 crores during 2021-22.
The Statement of Claims Data (L-40) submitted by the Life Insurers indicates an increase in the number of surrendered claims settled by a few of them during 2021-22. In the case of the HDFC standard, it increased from 1.44 lakh claims in 2020-21 to 3.34 lakh claims in 2021-22. So is the case with Max Life.
However, in the case of ICICI, there was a fall in the number of cases settled in 2021-22, with 3.2 lakh surrendered claims compared to 5.26 lakh in 2020-21. It ought to be noted that the number of surrendered claims in 2019-20 and 2020-21 is in contrast to the declining trend in the number of surrendered claims for ICICI Prudential. Meanwhile, as highlighted earlier, there is an increase in the value of these claims during this period. The same is the case with SBI life, which reported a decreasing number of surrendered claims settled over the years.
Most of the insurers had an increase in the number of surrendered claims settled during 2016-17 & 2017-18, irrespective of the prevailing trend. Data across the life insurers indicated that nearly most of the surrendered claims received are settled.
Increasing trend of Average value per claim settled
The average value per claim is derived by dividing the total paid value of the surrendered claims by the total surrendered claims paid in the year by the respective insurers. Barring a few exceptions, a common trend that is observed across the life insurers is the increase in the average value per claim over the years.
In the case of LIC, it was Rs.70.6 thousand in 2012-13 which increased to Rs. 1.5 lakhs in 2020-21. In 2021-22, it fell to Rs. 44.76 thousand. The exponential increase in the number of surrendered claims in 2021-22 seems to have reduced the average value. While there could be various factors influencing this and there are no clear reasons highlighted, certain observations can be made. The increase in the average value over the years across most of the Life Insurers could be due to the increase in value of the surrendered claims due to a higher ageing of the policy or the higher value of the policy itself.
The fall in the value in the case of LIC could be due to a high number of new policyholders surrendering their policy due to the prevailing situation. However, this is not so evident in the case of Private insurers. The impact of COVID-19 could have been more pronounced in the case of households with lower earnings which is reflected in the huge increase in the number of surrendered LIC policies.
The trends for surrendered claims are influenced by various factors and is not entirely possible to zero down on specific reasons for these trends. However, certain broad influencing factors could be highlighted. One major influencing factor could be the economic slowdown resulting in the surrender of policies by households with lower earnings, especially in the case of LIC policyholders. The years in the aftermath of Demonetisation, as well as the COVID-19 pandemic, reported an increase in surrender claims.
Featured Image: Surrendered LIC policies.
