‘Rise in early exits from life policies points to misselling’

MUMBAI: RBI’s Financial Stability Report has flagged a rise in early exits from life insurance policies, with surrenders and withdrawals now exceeding maturity pay-outs, signalling policyholder dissatisfaction and the risk of mis-selling. The report also said that surging distribution costs raise the risk of acquisition-cost-driven mis-selling.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. “The scale of this increase is broadly commensurate with premium growth, but the composition of pay-outs signals a structural concern. Surrenders and withdrawals have risen sharply, accounting for approximately 38.3% of total pay-outs in 2025-26, going beyond maturity benefits which stood at 36.9%. Death claims have normalised to around 8.1%,” it said.The report said the near parity between surrenders and maturity pay-outs indicates that policyholders are increasingly exiting policies prematurely. “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. Persistently elevated surrender rates also signal policyholder dissatisfaction, product mis-selling, or competitive pressure from alternative financial instruments,” it said.On commissions, the report said there is 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. 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. According to past data, withdrawals and surrender pay-outs have remained elevated, driven by private sector. 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.