Page 35 - Insurance Times May 2020

Let us have a look at the products offered by life insurance term insurance rates in India are certainly going to see a
companies in India. They are term insurance, endowment / hike in the premiums very soon, if not already happened.
whole life products and pension products. Along with the The contribution of term premiums in the total annual
base products, they also offer riders as an attachment to premium equivalent is also going to increase and it is good
the base policy at a cost. There are different types of riders for the life insurance companies as these products provide
such as additional term insurance, accidental insurance, good margins for them.
permanent / partial disability insurance, critical illness
insurance etc.. Now, the point is whether the companies will reduce their
margins and keep the rates low for the Indian community?
Term insurance is a commodity offered by all life insurance Very unlikely as the solvency margins are to be essentially
companies with different rates, which depend on the cost maintained by the companies as per the regulatory
structure adopted by an individual company. People choose provisions. At the end, BE PREPARED to pay much higher
the company on the basis of advisor, brand name and a few cost for term insurance in future.
service parameters such as customer satisfaction index and
claim settlement ratio. However, the nature of this product The other kind of the life insurance products endowment/
is same, which is, money will be paid to the nominee / whole life policies. In this again there are products which
beneficiary on the death of the insured either as lumpsum give guaranteed returns called non-participating products.
or instalments. There is another variation where the These products do not participate in profits/losses of the
premiums paid during the term of the policy will be refunded company and returns are guaranteed over the period of the
at the end of the policy if the policyholder is alive, which is contract. The companies carry a higher risk of the
called ROP (Return of Premium benefit). guaranteed returns over long period, the return is also very
low.
Some interesting facts about term insurance premiums is
that due to high competition among the life insurance However, it is guaranteed during the life of the policy and/
companies, the premiums have been going down and down or at maturity as the case may be. It is essential that the
from 2001 since the time the private companies have come companies have to provide for sufficient reserves to meet
to India. Though the cost of term insurance is going down, these guaranteed returns. According to a report published
the share of annual premium equivalent has gone up from by 'AM Best' rating services, 73% of 60 companies which
less than 5% three years ago to 20-25% as of now. This is failed in 2000-2001 was attributed to insufficient loss
good for the life insurance companies, as protection plans reserves. Apart from this, other factors such as overstated
give the best margins for them. assets, under-pricing, unforeseen claims and catastrophic
events also contributed to the failures of insurance
Let us see how is this going to change. The term insurance companies.
plans are high risk products for the life insurance companies,
and at the same time the margins are also high. How does The other set of endowment policies are participating
it happen? The majority of the risk is transferred to re- policies. They will not have any guaranteed returns, but
insurance companies which are the ones who insure the risk depending on the company's performance and valuations at
of insurance companies. The re-insurance companies the end of each financial year a profit sharing is done with
generally operate globally and hence the risk is balanced in the policyholders in the name of 'bonus'. This can vary every
case something goes wrong with a particular corner of the year and gets accumulated which will be paid to the
globe. By now you must have understood what is going to customer at the time of maturity. In such products the level
happen now onwards. You are right.. Since the pandemic of risk for life insurance company is reduced. However, to
affected all the countries on the earth, the equations of remain competitive in the market, few companies tend to
reinsurers is going to change. declare higher bonus which can be dangerous for the
company's existence.
They will globally increase the cost of term insurance. As of
now the cost of term insurance is very low in India compared In case the companies resort to the practices such as under-
to developed nations such as US, Singapore etc.. Since, the pricing connected with rapid expansion, entry into new areas
cost is already high in advanced countries, re-insurers will and delegated underwriting etc. can also put them in
focus on the countries where the cost is low and will try to trouble. It is pertinent to note that a rating agency for
increase the rates in those countries. Consequently, the country-specific factors which could adversely affect an

The Insurance Times, May 2020 35