In the classic book, Against The Gods: The Remarkable Story of Risk, American economist Peter L. Bernstein iterates that the revolutionary aspect which delineates the boundary between modern times and the past is the mastery of risk. Insurance and reinsurance help in the mastering of risk of any sort by the modern societies.
From managing financial losses in the aftermath of natural catastrophes such as earthquakes to protecting industries against man-made catastrophes such as terrorism, reinsurance helps insurers by providing the financial capacity for sharing of risks, and plays a pivotal role in global risk management. Almost 80% of the insurance cover is backed by the reinsurer; hence, they have the right to determine the price along with the insurer.
Mechanism of Life Insurance
As any other form of insurance, life insurance is based on three concepts: pooling many exposures into a group, accumulating a fund through premiums and paying from this fund for the losses of those who die each year. That is, life insurance involves the group sharing of individual losses. To set premium rates, it is important for an insurer to be able to calculate the probability of death at various ages among its insured, based on pooling. But in India, mortality rates still work on an assumption.
Today’s term insurance prices work on a key assumption that the rate of mortality of the pool of customers, which can be enrolled under the current term insurance plans, will be approximately one-fourth of the death experienced for the average Indian population. However, if we go one level deeper, the online prices are cheaper as they are built on the mortality assumption of one-fifth or 20% of the average Indian customer. This is because online caters to a more affluent segment of customers and, hence, better life expectancy. Offline prices which are higher than online are built on the back of mortality assumption being roughly one-third or 33% of the mortality rate of the average Indian population.
The current prices are an outcome of this base assumption, which is now getting challenged as there has been a consistent rise in incidences of claims. This has led to both Indian and global reinsurers taking a cautious stance as far as providing covers is concerned. There is a vivid difference between the early trends and the actual mortality experience, which is a clear indication of why term prices will get expensive. At an individual insurance company level, this trend may not be credible yet, but when reinsurers look at the results for all the companies together, they seem more credible. If reinsurers revise the rates for life insurers, the insurance companies may be forced to revise the end price for the term plan customer.
Insurance runs on the principles of risk and probability. Both risk and probability can be ascertained by information and experience that is available to insurers about the target masses. The more accurate the available information is, the lower is the risk and more accurate the estimation of expected deaths.
Over the last decade, term prices in India have come down. If we were to compare these prices with developed countries like the US, Dubai and Singapore, they are actually lower. Competition in the Indian insurance marketplace is a key reason for lowering of prices and this is perhaps the best time for customers to buy term insurance. On an average, the premium rates of term policies are about 30% higher in the US and Singapore, according to data from Quotacy.com, a US-based insurance aggregator, and Singlife.com, a Singapore-based insurance company.
A comparison of term insurance premiums offered by three prominent insurers in India, the US and Singapore for a 30-year-old non-smoker male, with a total sum assured of ₹2 crore over a term of 35 years, will give you an idea. For India, Edelweiss Tokio Life Insurance charges an annual premium of ₹14,042 (the cheapest in India); in the US, US Life charges $311 or ₹22,177; and in Singapore, Singlife charges a premium of $415 or ₹29,591.
The current term insurance prices in India are actually unsustainable. As reinsurers increase their cost price, life insurers will take strategic calls on term insurance pricing through trade-offs between profitability and price. Since life insurance companies depend on term insurance—they are a major source of profitability in the long run—the likely outcome is price increase for customers. We should see some degree of premium rate correction in the near future with all key brands adjusting to the new reality over the next three to 12 months