The Era Of Cheap And Easy Term Insurance Plans May Be Over

Reinsurers are becoming stricter about underwriting and the documentation required from customers, said Vighnesh Shahane, managing director and chief executive of Ageas Federal Life Insurance. “It will not be so easy or cheap to get a term product in India.”

The quantum of hike, he said, will vary depending on the insurer, the reinsurer and the volume of business between the two.

The revenue and profit of listed life insurers tumbled in the quarter ended June as they set aside more provisions against anticipated claims from the deadlier second Covid-19 wave. ICICI Prudential Life Insurance Co. saw the biggest sequential decline in new business premium at 50%, followed by SBI Life Insurance Co. and HDFC Life Insurance Co.’s 46% and 43% fall, respectively. The companies have yet to report their earnings for the quarter ended September.

Term plans are likely to turn costlier because of three mains reasons:

Risks Of Higher Penetration

Since the original target group for term or protection products was the affluent category with better medical facilities, a lower risk was associated with lower premium, according to Prithvish Uppal, analyst at IDBI Capital Ltd. But as penetration for protection products rose, lower-income groups susceptible to higher risk merit higher premium, he said.

Cheaper Than Developed Countries

While India has a lower life expectancy, pricing has been on a par with the developed nations where people live longer on an average, according to Uppal. Annual premiums in Hong Kong, with a life expectancy of 84 years, are around Rs 12,000, about the same in India where mortality age is 69 years, he said.

Covid-Induced Expenditure

An upsurge in claims due to the pandemic, especially the second wave, prompted reinsurers to hike rates, according to Mohit Mangal, analyst at Anand Rathi Financial Services Ltd. “In Q1 FY22, HDFC Life’s gross claims were Rs 1,600 crore and net claims were Rs 960 crore,” Mangal said. “Thus, the reinsurers had to bear the burden of Rs 640 crore.”

Premiums declined in the 10 years through 2019. But just prior to the pandemic, reinsurers—companies that provide financial protection to insurance firms—raised prices ranging between 15% and 40%, according to Uppal.

ICICI Prudential Life Insurance passed on the entire hike to customers in July 2020, Mangal said. Others didn’t.

“HDFC Life and SBI Life chose to retain some portion of this hike on their books while others, in a bid to expand their protection business, absorbed the entire hike," Uppal said.

HDFC Life, SBI Life and ICICI Prudential Life refused to respond to queries from BloombergQuint citing the silent period ahead of their earnings.

Shahane said insurers may take a decision “depending on their expectations and predictions of the future and how the pandemic is likely to play out”.

According to Uppal, the companies will pass on the increase in reinsurance costs based on their historic mortality experience and follow a cautious underwriting approach to avoid pandemic-related uncertainties.

“ICICI Prudential is most likely to continue passing on the entire hike to customers due to its management policy,” he said. “[But] HDFC Life and SBI Life may also follow suit, unlike in the past.”

Unlikely Gainer: LIC

As term plans of private insurers turn costlier, Uppal expects one company to gain: state-run Life Insurance Corp.

The hikes will narrow the pricing gap with LIC. Currently, private firms charge around Rs 10,000 to Rs 15,000 a year for a plan worth Rs 1 crore, while LIC which sells similar policies at Rs 20,000-25,000, Uppal said.

“LIC is most likely to benefit from the price hike as brand recognition will enable it to gain market share in the protection business.”

Uppal also expects a volume growth in the third quarter before the reinsurers increase prices by December-end.