The awareness towards life and health could never have been more than it is today. A tectonic shift that continues to cut across classes, generations, and most importantly people’s mindsets. In my view, the Indian insurance industry saw, maybe for the very first time, a proactive market pull towards protection solutions, primarily term plans. No longer are term plans viewed as base instruments to save taxes. All of us now are aware, and perhaps have experienced the huge cost one has to pay for ignoring adequate life insurance coverage.
However, this market opportunity was killed with the biggest irony. At a time when the country executed a drive where over 120 crore people were successfully vaccinated and the wave of health awareness was at an all-time high, the protection business couldn’t have had a better opportunity for its penetration. But ironically, the industry was struck with premium hikes in the Term plans. The first round happened last year and today it is yet again bracing itself for a major rise. This is the result of the change in the reinsurance prices wherein the hike is set to be anywhere between 40-60 percent, basis the data of claims experience handled by the reinsurers.
Rising number of claims made it difficult for the reinsurers to offer term plans at older rates. In my view, this has come at a very inopportune time – as if the industry has to pay a severe price for a past that is killing the opportunity for the future. Lack of reinsurers in this market has made it difficult to share costs and is putting the very existence of this important financial solution in jeopardy. It is clear that today the life insurance industry needs more reinsurers to participate and make this product more competitive and easier for the customers to access.
What it means for customers
This price hike by reinsures means the companies will need to raise premium costs between 25 percent and 35 percent. And, in a price sensitive market like India, this would mean a major roadblock for individuals planning to buy a Term Plan. Moreover, there is another long-term impact.
Assuming that the market rebalances, and prices come back to normal in a year or two, those who buy their plans post-hike will have to continue with the increased premium structure until policy maturity i.e., minimum 25 to 30 years. And waiting for the market prices to be reduced again might just increase one’s risk manifold. But, whatever be the situation, not having a term plan for the next 1-2 years will be a major risk to take. So, worrying about the prices cannot be an option today. Given the uncertainties, a term plan is a must.
What it means for the life insurance industry
Let alone customers, this hike is no good news for the industry as well. Life insurers are fighting the biggest dilemma wherein they have to execute a fine balance between what can be passed on to the customers and what can be absorbed by the company. It will have two major impacts on the industry. First and foremost, in case the premiums do not go up, the hike will put margins under severe pressure and will impact profitability. Secondly, if the price hike is marginal, it will have a negative impact on both pricing and margins. Along with the price hike, life insurance companies have also witnessed an increase in the retention limit which will further put some pressure on future claims.
Hence the irony! Without a clear line of sight on the long-term COVID-19 scenario, a higher retention book is a risky endeavor. Whereas the price hike will ruthlessly hack away potential business, in an otherwise fertile market space. In essence, a product that helped shore up margins will definitely question itself in the product strategy for all insurance companies, in view of the risks associated with the product.
What should customers' action plan be now?
Price hike is imminent. Therefore, if one has not bought a protection cover yet or has not reevaluated their coverage, the time to do so is now. If someone can still purchase a term plan at older rates, that is before the insurance company has increased its price, one should definitely opt for a suitable plan and lock-in premiums at older rates. After all, the threat of severe COVID-19 mutations still looms large and the uncertainty remains. To put it as plainly as possible, the need for a comprehensive protection cover with adequate sum assured has never been as necessary as it is today. So, irrespective of the price hike, it is only prudent to revisit one’s financial portfolio and rejig it with a term plan.(The writer is MD & CEO, Aditya Birla Sun Life Insurance)