Term Life Insurance Premium

Increase in term life insurance premium delayed by 10-15 days

Term Life Insurance Premium were earlier increase from 1 April.

But the move has been defer now and is likely to be raise later this month.

Term Life Insurance Premium

The increase in term life insurance premium may be delay by 10-15 days as re-insurer contracts await renewal.

New product for a few insurers are yet to be approve, according to insurance brokers.

These premiums were earlier set to be increase from 1 April, but it has been defer now and is now likely to be hike later this month.

These are premiums that life insurers pay to reinsurers for re-insuring their risk.

According to the previous reports, premiums for term insurance were expect to rise by up to 20% in 2021 as insurers take into consideration the emerging mortality rates.

Term insurance policies normally are pure risk cover

Term Life Insurance Premium normally are pure risk cover which is payable only in case of the death.

Currently, in India, the term insurance policies are extremely economically price give that.

The key influencing factor is the expect mortality risk on the portfolio or in simple words.

The incidence of loss due to death of the life assure.

Moreover, one should know that term insurance premium rates are determined by the insurance company based.

On the probability of death (mortality rate) at various ages among its customers.

In western countries, this is done by insurance company’s basis actual data whereas in India this is done basis the assumption of death rates.

Term Life Insurance Premium

An insurance company normally works on a concept of creating a pool of fund through premiums, which is being pay by their policyholders.

From this pool of funds, they settle the insurance claims of affect policyholders who die every year.

This way, the concept of life insurance involves the group sharing of individual losses.

And a large part of this pool is reinsure by the insurance companies.

Hence, the renewal or renegotiating of re-insurer contracts impact the premiums.

looking at the current covid-19 scenario, an adverse mortality experience over the past few years has intensify.

Which has now led reinsurers to increase their rates resulting in an upward revision of term insurance premiums.

How Life Insurers arrive at the Term Insurance Premiums?

A good place to start our analysis is to have an understanding of the pricing rules of term insurance premiums

A term insurance policy is a very long term contract running into 30, 40 or even 50 years.

This means that the insurance or reinsurance company takes a fairly high amount of risk with the assumptions.

These assumptions are the root of the four pricing elements used in arriving at term insurance premiums.

Let’s look at each of these in greater details

1. The Cost of Mortality

The mortality cost is that part of the premium that is the charge on basis the probability that the policyholder will die at a particular age.

This cost is the most important component in determining term insurance premiums with a 50% to 70% weightage.

We’ll discuss more on this later in this post.

2. Operating Expenses of the Insurance Company

Operating expenses includes the day-to-day costs of running an insurance company. The major operating expenses include:

  1. Marketing costs
  2. Underwriting costs
  3. Policy creation costs
  4. Distribution expenses
  5. Post-sale servicing expenses &
  6. Claim disbursement expenses

3. Lapse Rate or Persistency Rate

Lapse rate is the inverse of Persistency Rate. I mention both in this post because some insurers use lapse rate while other use persistency as their internal metric.

The lapse rate is an assumption.

This is where the insurer is guesstimating how likely is it that a policyholder will stop paying premiums in the future.

The lapse rate is not always a bad thing for the insurer.

4. Lapse Rate or Persistency Rate

Investment income are the returns earned by the insurer on the premiums advanced by policyholders.

All consumers have to pay the premium in advance towards insurance contracts.

This is a regulatory requirement as well and capture as Section 64VB of the The Insurance Act, 1938.

This section says  No insurer shall assume any risk in India in respect of any insurance business  until the premium payable is received by him or is guaranteed to be paid by such person.

unless and until deposit of such amount as may be prescribed, is made in advance in the prescribed manner.

Term Life Insurance Premium

what do insurers do with the premium?

Insurance companies take this premium and deposit it in fixed income and safe instruments.

The IRDAI prescribes where all the money can be invested in their regulations.

This is generally restricted to instruments like short duration bonds, AAA rated paper, treasury bills etc.

How much do insurers make from these investments?

Currently, insurers make an yield of 8-9% per annum.

But this might not be the case 10 or 20 years from now as interest rates and bond yields tend to swing over the years.

Great! So these were the four pricing variables.

Possible Reasons behind Term Insurance Premiums Increase

In this section, we look deeper at the pricing components. And understand why the need for premium increase has come up.

Increase in Mortality Rates

We discussed earlier that the mortality cost is the biggest expense component in determining term insurance premium.

WHAT IS REINSURANCE?

Reinsurance is the insurance that an insurance company purchases from another insurance company.

This helps insurance company insulate itself from the risk of major claims events.

This is definitely the case in term insurance where claims are often ₹1 crore or more in value.

As a result, Indian life insurance companies reinsure (or ‘cede’) up to 80% of their term insurance risk to a reinsurer.

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