Have you been still pondering on whether to buy term insurance and which one to buy? Our advice is; do not waste time as this is the perfect time to buy a term insurance policy. The experts in the actuary and insurance industries are suggesting that the premium rates of term insurance policies are likely to increase from April 1st, 2020. They opine that the reinsurance companies are like to increase their Rate on Line, which, in turn, will affect the consumers who buy term insurance plans.
What is reinsurance?
Most life insurance companies insure themselves against conditions when the insurance claims far exceed than what they had predicted based on statistical calculations. In such a case, the insurance companies are likely to face a loss. Therefore, they buy insurance cover for themselves from reinsurance companies. Reinsurance, thus, is a way to distribute the risk and minimize the damage. It is a transfer of some of the liabilities from insurance companies to reinsurance companies
For example, suppose an insurance company provides life insurance assuming the mortality will not increase beyond a certain percentage. However, if an epidemic breaks out, the mortality due to death may be much more significant than their base assumption, and they have to give out a much larger sum of money from claims than they have accumulated from premiums.
To save themselves from facing these kinds of unwarranted situations; insurance companies turn to reinsurance companies for risk transfer, arbitrage, capital management, solvency margins and expertise.
What is reinsurance rate and Rate on Line?
Reinsurance rate is the rate at which reinsurance companies provide insurance to the insurance companies. Rate on Line (ROL) is the ratio of premium paid to loss recoverable in any reinsurance contract. Rate on Line represents how much an insurer has to pay to obtain reinsurance coverage, with a higher ROL indicating that the insurer has to pay more for coverage.
Why are the prices of the policies supposed to increase?
The reinsurance companies consider a number of factors before deciding on the Rate on Line. This includes the frequency and severity of claims made and the severity of claims made in recent past. If the number of claims is higher or more severe, the reinsurance companies are forced to charge a higher premium. In India, the rates of policies have been on the lower end of the range because of high competition in the insurance market. However, it has been observed that the incidence of mortality and claims have increased in the recent past, making these rates unsustainable in the longer run.
As most life insurance companies rely on term insurance for profitability, any increase in the cost price of the reinsurance will most likely lead to a hike in the premium rates of the term insurance. Also, the share of term plans in annualized premium equivalent has gone up by about 20 percentage points in the last three years. We have also seen that the online purchase of protection plans has also substantially risen and they are cheaper. As it is assumed that the online customer base has a better life standard, the mortality rates are estimated to be lower, and thus, online policy rates are also cheaper. The prices of the premiums in India have remained almost stagnant for the last few years. Moreover, with so many claims and low premiums, the reinsurance companies do not feel satisfied at all. In response to the market transitions, they have decided to adjust their rates.
What should you do?
As the reinsurance companies are bent on increasing the rates, the consumers will have to bear the burden of this hike from Financial Year 2020- 21. It is being predicted that the changes in ROL by reinsurance companies will reflect in the premium rates of Term Insurance from April 1st, 2020. Sources say that this hike will be marginal for the customer of Life Insurance Corporation of India as it is going to bear the cost itself.
However, you can still buy a policy at the current lower prices if you hurry up and choose a term insurance plan best suited for you. So, get the lead out! We at Cover360 are here to help!