Explained: Why term policy premium rates are rising from FY22

Term insurance policies of private life insurers will see a rise in premium from FY22, as reported first by Moneycontrol.

his is on the back of rising death claims due to Covid-19 and a hike in reinsurance rates. So far, close to Rs 250 crore has been disbursed as Covid-19 death claims in India.

LIC, being the country’s largest insurer, will not be hiking premiums because of its wide insurance policy base and higher bargaining power with reinsurers.

“Private insurers don’t have the flexibility to bring down rates with global reinsurers. LIC is able to do that and hence their premiums are not being hiked,” said the India head of a global reinsurer.

Reinsurers have hiked rates globally amid fears of a second wave of Covid-19 in parts of South-East Asia (including India), the United States and the UK. The Coronavirus that causes Covid is said to be more active in the winter months.

Why are rates being hiked?

Reinsurance premiums are paid by insurance companies to get cover when they provide protection for large risks. When the reinsurers hike rates, this is immediately passed on to customers in the form of premium hike.

So, if a reinsurance policy premium is hiked by 10 percent, this is passed on to customers in the form of a premium hike. Most reinsurance contracts are renewed between January 1 and April 1 in any year.

In FY21, term plan rates rose 15-20 percent as reinsurance rates for these policies had been revised.

When will the exact hikes be announced?

Insurance regulations require each company to file its product with regulator IRDAI with the revised premium rate.

IRDAI’s life insurance team reviews each proposal and approves the product’s premium hike. These new rates will come into force from April 1.

Insurers use mortality tables to determine who is at risk of death at what age, depending on past claims data. But 2020 was an aberration due to the Covid-19 pandemic, with more than 11 million Indians getting infected. The total number of deaths so far is 158,308. However, less than 3 percent of those who died of Covid-19 had life insurance policies.