Cost of term insurance likely to increase soon

An insurer generally works on a concept where they create a fund through premiums (paid by all their policyholders) and pay the insurance claims of those policy holders who die each year, from this fund.

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Insurers have revised term plan premiums and these higher premiums will soon come into effect.
Term life insurance premiums are likely to increase from April 10, 2020, according to insurance brokers. These premiums were earlier set to be increased from April 1, 2020 but the hike has been deferred to April 10 due to the coronavirus pandemic, as per industry sources.

The decision to defer the hike in premium has been taken to address any financial disruptions that customers might face during this lockdown. Thus, people who are planning to buy term life insurance for the financial security of their family can still buy it at the existing prices for the next few days, according to Santosh Agarwal, CBO-Life Insurance Policybazaar.com

Agarwal said, "The term insurance premiums are likely to go up by April 10, 2020, given the increased reinsurance costs. The premiums could go up by 40 percent to 15 percent depending upon the insurer. As re-insurers have revised their cost price due to stress in their business, reinsurance premium rates have been increased for insurance companies thereby impacting premiums of term insurance plans."


Why are re-insurers increasing cost?
An insurer generally works on a concept where they create a fund through premiums (paid by all their policyholders) and pay the insurance claims of those policyholders who die every year, from this fund. Thus, life insurance involves the group sharing of individual losses.

Therefore, to set term insurance premium rates, an insurer needs to be able to calculate the probability of death at various ages among its insured. But, in India mortality rates are still based on an assumption.

Agarwal said, "The term insurance prices we have today are based on the LIC mortality tables as no other data was available. While working out the premium, the private insurers assumed that fewer deaths will occur than what the state insurer believed. However, as per the latest industry data it appears that the mortality rate is higher than what was used earlier to calculate the premiums. The base assumption on which the current premiums are based is now being challenged. As there has been a consistent rise in incidence of claims, this has led to reinsurers, both Indian and global, taking a cautious stance as far as providing covers are concerned."

Hence, the re-insurers have re-worked the premium rates for the life insurers as the numbers of claim are rising. With the increase in cost of reinsurance (the re-insurers' premium rates), the life insurers may increase the premium of term life insurance policy for the end customers i.e the policy buyers.

Avdhesh Gupta, Appointed Actuary, Bajaj Allianz Life said, “Premium rates of term insurance plans are calculated on the basis of expected claims outgo. Over the last couple of years, the industry and the reinsurers (largely) have been experiencing mortalities higher than that assumed in the premium calculation, where the current level of premium rates have become unviable. Hence, we see an impending rise in premium rates."

The major source of profit for life insurers is normally sale of term life insurance policies. The insurers generally take strategic calls on term insurance pricing through trade-offs between profitability and price or premium.

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How cost of reinsurance impacts term plan
Term insurance policy premiums are decided by the insurer on the basis of various factors like mortality assumption, assessment of age and occupational risk etc. Apart from this, it is also dependent upon how much risk is being passed on to the reinsurer.

Reinsurers are the insurance companies that provide financial support to the insurers and they bear a certain amount of the risk linked with the term insurance policies sold by the life insurance company. Reinsurers reinsure the life insurance company to the extent of risk per policy they have taken over from the life insurance company.
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Vinay Taluja, Chief Product Officer, Bajaj Capital said that insurers have revised term insurance premiums and these higher premiums will soon come into effect. He said, "The premiums may rise because a major part of every term policy sum assured is reinsured and reinsurers are finding the claim ratios too high to maintain the reinsurance premiums."

Taluja explains:
Generally, life insurance companies take a reasonable risk per policy themselves and pass on the balance risk to a reinsurance company. For instance, for a term insurance policy of Rs 50 lakh cover, a life insurance company may decide to underwrite/take the risk of Rs 10 lakh per policy themselves and pass on the risk of the balance Rs 40 lakh to a reinsurer. This also helps a life insurance company to be more competitively priced and in case the risk retention by the insurer is on the lower side, then the premiums are virtually decided by the reinsurer since a major portion of risk per policy is being transferred to them. This way, reinsurance premiums directly impact the end customer premiums.''

Also read: How is life insurance premium calculated?
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