RBI's Financial Stability Report (FSR) has flagged a concerning rise in early exits from life insurance policies, with surrenders and withdrawals now exceeding maturity pay-outs, according to a report in Business Today (Mayur Shetty). The data signals policyholder dissatisfaction and the risk of mis-selling.
Key Findings from the FSR
The report said total benefits paid by life insurers rose from around Rs 5 lakh crore in 2021-22 to Rs 7.3 lakh crore in 2025-26, marking a 16.1% increase over FY25. Surrenders and withdrawals accounted for approximately 38.3% of total pay-outs in 2025-26, surpassing maturity benefits at 36.9%. Death claims normalised to around 8.1%.
| Component | Share in 2025-26 |
|---|---|
| Surrenders & withdrawals | 38.3% |
| Maturity benefits | 36.9% |
| Death claims | 8.1% |
The near parity between surrenders and maturity pay-outs indicates policyholders are increasingly exiting policies prematurely, the report said.
Implications for Asset-Liability Management
"This shift has direct implications for asset-liability management (ALM), as early exits disrupt the long-duration assumptions underpinning life insurance investment strategies and can force asset liquidation ahead of schedule," the report noted. Persistently elevated surrender rates also signal policyholder dissatisfaction, product mis-selling, or competitive pressure from alternative financial instruments.
Rising Distribution Costs and Mis-selling Risk
The report highlighted a divergence in cost structures between public and private life insurers. Private insurers have seen their commission ratio nearly double from FY22 while operating expense ratios have remained stable. "This escalation in distribution costs significantly outpaces private sector premium growth, compressing net margins and raising the risk of acquisition-cost-driven mis-selling," it said.
In FY25, the industry paid out Rs 6.3 lakh crore, of which Rs 2.3 lakh crore went towards surrenders and withdrawals and Rs 2.2 lakh crore towards maturity benefits.
Regulatory Response
Speaking at a Life Insurance Council event last week, Irdai chairman Ajay Seth said the regulator is working on distribution reforms to address product suitability. He said the measures could involve requiring better illustration of how benefits would play out.
Implications for Finance Executives
For CFOs and treasury professionals, the rising surrender rates and commission costs suggest increased operational and credit risks for life insurers. Companies that hold insurance products as investments may face liquidity mismatches. The regulatory focus on distribution reforms could alter product pricing and persistency assumptions, affecting the cost of capital for insurers and potentially their credit ratings. The FSR's findings underscore the need for rigorous due diligence on insurance counterparties.
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