Surrender value norms: What Morgan Stanley says on SBI Life Insurance Company shares

Morgan Stanley citing a media report said IRDAI is likely to revisit surrender value regulations after recently issuing final guidelines. While the foreign brokerage awaits further details, it feels that the life insurance industry has multiple options to help manage the impact.

"This could however be an overhang on stocks, capping upside until there is more clarity," it said.

A media report suggested that the rise in surrender value will be higher than the notifications approved in March 2024, but lower than the ones discussed in December 2023.

"Current regulations affix surrender value as the higher of guaranteed and special surrender value. Per the media report, IRDAI is planning to use a formula-based approach to affix special surrender values as well. The media report suggests the final impact to be less onerous than the December 2023 norms. We await more details. This could present an overhang on stocks, in our view, capping upside until there is a final outcome," Morgan Stanley said.

The foreign brokerage said SBI Life Insurance Company Ltd would likely see the least impact as it has the lowest exposure to non-linked APE.

"It remains our top pick in the space. In our view, the win-win solution is product differentiation, i.e. a product with high surrender value, low IRR and vice versa, and let the customer choose. We believe protecting returns for continuing customers is equally important as giving liquidity to surrendering customers," Morgan Stanley said.

In the event of an adverse regulation, Morgan Stanley believes the insurance industry could look to manage by sharing the hit with distributors (lower commissions and/or trail commission structure).