Increase in Early Life Policy Exits Signals Potential Mis-selling Issues
MUMBAI: The Reserve Bank of India’s (RBI) Financial Stability Report has highlighted a concerning trend in the life insurance sector, noting a significant increase in early exits from policies. Surrenders and withdrawals have now surpassed maturity pay-outs, indicating growing dissatisfaction among policyholders and raising concerns about potential mis-selling practices. The report also pointed out that rising distribution costs could exacerbate the risk of mis-selling driven by acquisition costs.
The total benefits paid by life insurers are projected to rise from approximately Rs 5 lakh crore in 2021-22 to Rs 7.3 lakh crore by 2025-26, reflecting a 16.1% increase over FY25. While this growth aligns with premium increases, the report warns that the composition of these pay-outs reveals deeper issues. Surrenders and withdrawals accounted for about 38.3% of total pay-outs in 2025-26, outpacing maturity benefits at 36.9%. Death claims have stabilized at around 8.1%.
The near equivalence of surrenders and maturity pay-outs suggests that policyholders are increasingly opting to exit their policies prematurely. This trend poses challenges for asset-liability management (ALM) as early exits disrupt the long-term assumptions that underpin life insurance investment strategies. Elevated surrender rates may indicate dissatisfaction among policyholders, mis-selling of products, or competitive pressures from alternative financial instruments.
On the topic of commissions, the report noted a stark contrast in cost structures between public and private life insurers. Private insurers have seen their commission ratios nearly double since FY22, while their operating expense ratios have remained stable. This rise in distribution costs is significantly outpacing premium growth in the private sector, which compresses net margins and increases the risk of mis-selling driven by acquisition costs.
At a recent Life Insurance Council event, Irdai chairman Ajay Seth mentioned that the regulator is pursuing distribution reforms aimed at improving product suitability. These measures may include enhanced illustrations of how benefits will be realized. Historical data indicates that withdrawals and surrender pay-outs have remained high, particularly in the private sector. In FY25, the industry disbursed Rs 6.3 lakh crore, with Rs 2.3 lakh crore allocated to surrenders and withdrawals, and Rs 2.2 lakh crore for maturity benefits.
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