Quotes for premiums vary a lot between insurance companies, even for simple term plans. While availability of term plans both in online and offline modes is one of the primary reasons, here are few other reasons due to which their premiums can differ.

Risk and demographic factors Insurance premiums are a reflection of the perceived risk to the life insured. If the risk is more, insurance companies would quote a higher premium to cover the risk. For instance, the term insurance premium for a cover of ₹1 crore for a 25-year-old male would be lower than the term insurance premium for a person of the same profile but having cancer. Insurance premiums are also based on the claim experience of a particular insurer in a particular area or market segment or on demographics. Companies such as LIC, which have the bulk of their customers residing in rural areas, would quote a higher premium compared to an insurer that covers people living only in metros. This is because mortality is higher in rural areas and in weaker sections of society. Furthermore, people living in metros are expected to be educated and are expected to fill their application form themselves with correct details and full disclosures, while people in rural areas rarely fill their form themselves and leave it up to the agent, who might fill in incorrect details to disguise the risk in an insurance application.

Varying mortality tables Another key reason due to which premiums can differ is the mortality tables. Mortality tables are risk premiums for different life profiles at different ages and tenures. The tables are derived with the help of a qualified Actuary who studies the risk in all life segments on the basis of longevity, demographic patterns, city-wise claim experience, etc. It’s a known fact that the life-expectancy of a normal individual (longevity) has shot up considerably in the last 2-3 decades due to advancement in technology and medical science. Due to this, the overall claim experience of all insurers has improved in each age bracket, thus resulting in lower mortality rates. Now if a particular insurer, ‘A’, uses a mortality table structured in the year 1994-96, his quote for a particular life cover would be higher than the quote of an insurer using mortality tables structured in 2006-08. The above case is similar to that of LIC, which used mortality tables of 1994-96 until last year, when they started using fresh mortality rates.

Competition Lastly, in this competitive insurance market, new and smaller players may price their premiums attractively while maintaining rational mortality assumptions at the same time. This helps them gain market share quickly and gain distributor interest as well. This factor may also contribute extensively to the difference between term plan premiums.

The writer is Senior Vice-President, Bonanza Portfolio Ltd

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