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Rising Insurance Policy Surrenders Expose Deep Flaws in India’s Insurance System
Insurance policies sold with high premiums and false promises are rapidly losing trust and leading to policy surrenders before maturity. The RBI's Financial Stability Report reveals that a significant portion of insurance companies' total payouts now comes not from maturity or death claims, but from premature policy closures. The question is: why is insurance, once considered a source of security, becoming a loss-making proposition for ordinary policyholders?
Due to the high premiums and misrepresentation, there’s been an increase in the surrendering of policies before their term matures. Sometimes, the returns may not be in line with the returns that are promised, or sometimes the policies may seem to be unprofitable due to some reasons that are different from the returns that are being generated.
The issue of mis-selling of policies in the life insurance segment has been emphasized by the Insurance Regulatory and Development Authority of India (IRDAI) for a few years now. In the report, it is reiterated that the mis-selling of policies is a serious issue in the life insurance segment. According to the report, insurance products are being sold with a lack of information regarding the terms and conditions of the product, among other things. However, there is more to the mis-selling of policies than meets the eye, and new information from the regulations suggests that there is a serious issue at hand.
The Financial Stability Report reveals some worrying information and statistics. These reveal how India's insurance system works and who truly benefits from it. Life insurance payouts are growing rapidly. At first glance, this may seem like a sign of a healthy insurance sector that is fulfilling its promises. However, the truth is more worrying. Total profits paid out by insurance companies increased from approximately ₹4 lakh crore in fiscal year 2020-21 to ₹6.3 lakh crore in 2024-25. However, a growing portion of these payouts is coming not from insurance policy maturity, but from premature termination, surrender, and withdrawals. This means that more people are surrendering their policies prematurely at a loss.
Data shows that insurance companies have made 37% of payouts for policies subject to premature surrender and withdrawal. Only 7.5% of payouts are for death claims. Only 35% of policyholders maintain their policies until maturity.
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Policyholders are falling prey to the trap of banks and agents who extort commissions. Recent data provides strong evidence of this problem, especially among private sector companies, whether life or non-life insurance. The traditional life insurance product is designed like a trap. Insurance agents lure customers in the first year and then move on. High surrender rates are not accidental; these commissions are deeply ingrained in the dominant distribution model.
