Why are term insurance premiums increasing?

Know why you may have to shell out 25% more for your term insurance

Decoding Insurance

Life is uncertain. Period. 

You never know when a loved one (or not so loved one) could meet with an accident. Uncertainty breeds risk. And risk breeds tension. To save ourselves from this tension, we’ve created a great product: insurance.

Q: But how exactly does it work? How can insurance companies afford to pay Rs. 1 crores when someone dies, by us just paying a fraction of that amount?

Catastrophe doesn’t strike at once for all families in usual circumstances.

So, what if all families could agree upon, from an early stage, to pay some money separately to a ‘protector’? And, only those who were unfortunate would get a predetermined amount paid by this ‘protector’?

Let us all suffer a little so that no one suffers a lot?

(Note: To read more on how insurance companies make money, and dig a little deep into Life Insurance Company (LIC), read this (10 mins read).)

Now, you have to agree that the risk for an insurance company is pretty high. 

If there’s a calamity like Covid, insurers may have to shell out a lot of money. To give you data, life insurance claims increased 5-10 times post the 2nd wave! 

Wouldn’t it be nice if the insurance companies could also get insurance for this risk?

Well, they can. And this is called re-insurance. There are certain risks that are so big that the insurance companies cannot simply stomach on their own. And so, the insurance companies go to reinsurers to get themselves insured. 

Why are Insurance Premiums increasing?

Munich Re, a German insurance company, is the go-to re-insurer for the majority of Indian insurance companies. 

And, it is now increasing charges for pure protection plans (an easy-to-understand explainer in Noob’s corner below) by up to 40%. This means that it is going to charge the insurance companies 40% more to re-insure term insurance.

Why increase the rates, you ask?

Reason 1: Remember when we said that the life insurance claims have increased 5-10 times post the 2nd wave? This ultimately burnt a hole in the pockets of the reinsurers. 

Reason 2: As per an article by Business Standard, “experience from term policies that were sold in the past without proper medical check-up has not been satisfactory.” 

Lately, insurers have relaxed the requirements for medical check-ups. 

Why? To reduce lead time, or conversion time per unit of policy sold (and get more out of their limited sales bandwidth). The pandemic has made a lot of people aware of the benefits of taking insurance. This has, in turn, increased leads for insurance companies.

To match the incoming demand, insurance companies had to quickly reduce their “lead time” (as the sales are done majorly via insurance agents). In this race for capturing growth, and not letting go of business, health check-ups were forgone. Plus, social distancing added to the confusion.

Why is this bad for the ecosystem? Because it increases the number of settlements, the insurers will have to process later. The risk in the system increases, making it vulnerable to higher losses.

Since the insurance companies have passed on the risk to reinsurers like Munich Re, it’s the reinsurers that have to ultimately bear the losses. Hence, to safeguard themselves, the reinsurers are increasing premiums (by ~40%!).

This increase in premium is a cost to insurance companies, a portion of which will be passed on to us, the consumers. 

It’s us, at the end of the day, who will suffer. 

So, next time you are looking to buy insurance, and the insurance agents cheekily smile at you when you ask for the health check up to be done, you know why they wouldn’t be so keen on doing it :)

Also, those looking to buy new term insurance policies, do it now. The rates get locked in when you buy your policy, there won’t be a retrospective increase. 

The higher premium charges come into effect from December. 

Share this with your friends who need to know this. Show them you care. WhatsApp or Twitter. Godspeed!

Until next time, ReadOn.

Noob’s corner

What’s a pure protection plan?

“Pure”: only insurance, no investment

“Protection”: in case you die earlier than your policy expiry date

If you die after the policy expiry date, your family gets nothing.

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