Here some terms used in this industry definitions and might be new to you I will do my best to add an explanation of most terms below in case something gets missed out or you’d want more information do write back to me in the comments box and I’ll be happy to address that point of view right let’s start with some basics a term insurance policy is a very long term contract running into 30 40 or even 50 years this means the insurance company or reinsurance company takes a fairly high amount of risk as assumptions might change from time to time these assumptions are what we call as the for pricing elements that can be used in arriving at your term insurance premium these are number one the cost of mortality.
The mortality costs is that part of the premium that is charged on 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 percent wait age number to the insurance company’s operating expenses include all costs related to servicing a policy dispersing the claimed marketing and distribution expenses the third pricing component is the persistency or 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 crudely put young term insurance buyers lapsing the policy is bad for business but older term insurance policyholders lapsing is actually good for the insurance business and finally.
The fourth and the last element that goes into pricing calculations are the investment income is the returns earned by the insurer on the premiums advanced by policyholders currently insurers make about eight to nine percent per annum but this might not be the case ten or twenty years from now as interest rates and bond yields tend to swing over the years to quickly recap the for pricing variables in determining the term insurance premium are the mortality cost the insurers operating expenses the lapse rate and the investment in you must have figured by now that all these for pricing variables are assumptions running into decades it is now the actuaries job to convert this multi-year estimation into a fixed annual premium that can be charged from the policyholder throughout the entire term of the policy in this section we look deeper at the pricing components and understand.
Why the need for premium increase have come up wediscussed earlier that the mortality cost is the biggest expense component indetermining the term insurance premium the reinsurer estimates the mortalitycost by referring to a table called the Indian assured lysed mortality or IALMtable that is published by the IRDA this table gives the mortality rates or therate of deaths occurring across different age groups for example themortality rate for a 30 year-old male 0.0009 77 this means for every 1 lakh 30year old males in India 97.7 males are expected to die in a single year thesame number jumps up to 453 per lakh for a 50 year old and just over 2400 deathsper lakh for a 70 year old in addition to consulting the IALM tableadditional conditions are imposed in acquiring term insurance policies tocontrol the claims experience these include the customer profile in terms ofincome and education cities from where policies can be sourced acquisitionchannels like banks agents online etc this is where some calls taken by theinsurers and reinsurers did not fructify in the manner that it was predictedwhich has led to an adverse claims experience in other words the number ofdeaths were more than assumed numbers in addition to claims experienced ourresearch reveals that some process accommodations offered by industryplayers also did not pan out as expected for example there is a practice ofoffering waivers on medical tests for select some assured for some age groupsor income brackets generally I see that a few popular insurers waive of medicaltests of up to 1 crore of sum assured if you are less than 45 years of age and ifyou are a graduate it is very likely that these calls to have not gone asexpected and the insurers will have to relook at these controls net-netour assessment is that the potential premium increase in term insurance plansis a mix of the mortality assumptions not panning out as expected and theunderwriting controls being overly relaxed in this final section.
We look atwhat to expect from the life insurance companies in the near future let’sunderstand this by drawing up a classical PNL statement currently forevery hundred rupees of premium collected the cost of mortality is 60rupees expenses are 30 rupees and therefore the insurer makes a profit of10 rupees now let’s say the mortality cost increases by 20% therefore the newmortality costs will be 72 now we now look at a few scenarios that theinsurers can adopt scenario 1 pass the entire increase in mortality cost to thecustomer by increasing premiums proportionately while this is easy to doa move like this will keep the sales team quite jittery as it might lead to adrop in the take-up rate of term insurance planshaving said this the insurance can also decide to partially increase the premiumand compensate the additional mortality cost by forgoing some parts of their profits scenario number two keep premiums at more or less the same levelwith tighter expense management expenses have two components one operationalexpenses and two distributor commissions a reduction in commissions paid todistributors will require renegotiating contracts with distributors which mighthave an impact on the product portfolio mix of insurance and finally scenarionumber three the insurer can adopt tighter controls aimed at receivingbetter rates from reinsurance a better input rate from the reinsurancemight be available if the eligibility and underwriting criteria were tightenedfor example insurers might look at pushing the minimum income criteria fromsay 3 lakh rupees per annum to 5 Lakh per annumthis helps because the data obtained from some insurers show that the claimsexperience in higher income groups is better than the lower-income groupssimilarly tight controls can include having a slightly higher minimum educational qualification such as graduation instead of an undergraduateor a diploma certificate in totality we see that there are a few scenarios thatare available for insurers to work on and the next 2 to 3 months will see theinsurers work out many permutations and combinations to get the best fit goingforward.
I expect the insurers to become more prudent in customer profiling and the insurance industry investing in data structures and technologies to have a better assessment of the risk, to sum up, term insurance in India has one of the most competitive pricing from anywhere around the world and this current pricing should not come as a surprise to anyone as the fledging Indian term insurance industry is still in a discovery phase we can expect many more such pricing and process changes in the future as the industry matures I hope you like the research and video content as much as I enjoyed bringing it to you if you have not opted for a term insurance plan yet or are sitting by the fence I suggest you to watch our previous videos on the benefits of term insurance and how to choose a term insurance plan.