Competition, varying mortality charges, provisioning, agent pressure are some factors

It’s no secret that the cheapest term insurance policies are the ones that are available online. But did you know that insurers charge widely differing premiums for similar plans?

For instance, the premium for a simple term plan of Rs 50 lakh from Bharti AXA (eProtect) is Rs 4,200 a year. But an identical policy from ICICI Prudential (iCare) costs Rs 7,000. For an LIC cover, you will have to cough up Rs 16,800.

These premium rates apply to a 30-year-old non-smoking male. All the quotes are for plain-vanilla term insurance policies covering just the risk of death, with no added advantages. So, why the big difference in the premium?

Experts say that the varying ‘mortality’ charge levied by insurers is one reason. Basically, insurers use mortality tables — data estimating the longevity of the population — to arrive at life insurance premiums for different categories of investors.

While LIC uses mortality tables dating back to 1994-96, most private insurers use tables released in 2006-08. As life expectancy has shot up over the last two decades, using a more recent version sharply cuts the cost of a life insurance plan. Using the new mortality table could mean a 5-10 per cent difference in the premium cost, say actuaries.

Subjective assumptions

Premiums can also differ based on the subjective assumptions that an actuary makes about the person applying for the policy, says Rajeev Kumar, Chief and Appointed Actuary, Bharti AXA Life Insurance. “When I am pricing online term plans, I assume low mortality because the level of disclosures is very high. The customer himself fills the form and not an intermediary, who may leave out facts about his (the customer’s) health.

“Therefore, rather than saying that online products are cheap, I would say that there is very little cross-subsidy in them compared to offline products. So, a non-smoker, who leads a very healthy lifestyle, is offered a very competitive rate,” says Kumar.

Competition, too, makes new insurers offer rock-bottom rates. Yashish Dahiya, CEO and Co-founder, Policybazaar.com, says: “In order to gain marketshare and distribution, insurers may reduce premiums even while maintaining rational mortality assumptions.”

For established players, such as LIC, there is less incentive to push plain-vanilla term plans, resulting in higher premiums.

Solvency margin

Mani Kant, Vice-President and Head of Life Insurance at India Insure Risk Management, one of the largest insurance brokers in the country, says: “Every insurance company has to maintain a 150 per cent solvency margin on the amount of risk taken in the books. More term policies mean more risk and the insurer has to provide additional capital.

“Therefore, some companies do not promote term insurance but prefer products such as ULIPs or endowment plans, where the risk cover is low.”

While LIC did not participate in this story, industry experts say that India’s largest insurer may also be wary of alienating its vast agent force by offering cheap term plans online. These plans are bought directly by investors and cut out the agent commission completely. In fact, while LIC does offer an online term plan, one cannot actually complete the purchase process without contacting an agent at the final stage.

LIC agents say that investors need to factor in a ‘premium’ for the insurer’s good record on claim settlements while assessing different plans. The latest data available from regulator IRDA, which is for 2011-12, show that LIC settled 97.4 per cent of the total claims received that year.

rajalakshmi.sivam@thehindu.co.in

(This article was published on November 30, 2013)
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