Returns on life insurance policies to drop as new surrender rules kick in.

Traditional life insurance policyholders will experience reduced returns on bonus-paying (par) and non-participating (non-par) products as insurers prepare to implement new guaranteed surrender value rules from October 1. The new regulations will allow policyholders to receive a guaranteed surrender value from the first year, even if they have only paid one annual premium, as opposed to the previous requirement of two years. However, returns will be lower for policyholders holding their policies longer. Non-par policyholders will see a 0.3-0.5 percentage-point return reduction, while par policyholders will receive lower bonus payouts. The impact on participating policies will be reflected in the next couple of years, with bonus rates expected to decrease over the long term.

The spread between government bond rates from the 10th to 30th year poses risks in providing policyholders with G-Sec credit as surrender value, potentially leading to decreased bonus rates for both par and non-par policies. Despite a decrease in government bond rates from 7.10% to 6.8% in the last four months, insurers have maintained the internal rate of return (IRR) on their products. However, the new rules are likely to compel companies to lower the IRRs and adapt to the current interest rate environment.

To protect their business margins, insurers may adjust their commission structures. Some may consider a 50-25-25 payout model for agent commissions, while others are contemplating trail-based commissions to better manage the financial impact of early surrenders. Insurance companies will need to align their commission payouts with the new regulatory framework, which may involve deferrals, clawback provisions, or reductions, particularly to address early surrenders.

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