Price hike in term insurance plans may not impact demand: Experts

Although quite a few life insurers may have to increase prices for term plans due to reinsurers hardening their rates on the term portfolio, industry insiders believe this will not have a negative impact on the demand for such products. They believe the awareness around these offerings has increased manifold after the Covid-19 pandemic.

According to R M Vishakha, managing director and chief executive officer, IndiaFirst Life Insurance Company, “Term insurance rates in India have been low for some time. The claims outgo for life insurers has increased due to Covid. The uncertainty caused by the pandemic could have resulted in reinsurers hardening their rates.”

“We believe this is unlikely to impact the demand for such products in the market, given the awareness around the need for such products after the pandemic is very high. However, consumers may decide to opt for a lower sum assured after a revision in rates,” said Vishakha.

Despite the price rise, term plans are relatively cheaper in India than in the US or even Singapore, said experts. Even before the onset of Covid-19, life insurers became aggressive on term products because it is a margin-accretive business, resulting in a price war where everybody was looking to offer term products at the cheapest rate. But the quality of underwriting slipped. And, Covid-19 further added fuel to an already raging fire.

Industry insiders believe if the prices do not increase, the supply side will shrink. Reinsurers may be forced to go out of business. If one were to take a larger view, it might not be such a bad thing that the prices are going up. This will mean the industry will stabilise because the cost to benefit is very high. 

Experts said after last year’s hike, term plan prices had gone back to 2014 levels. With another price hike, prices will go back to the 2010 levels when term insurance started in India. Rates were sustainable back then, but in the past 10 years, due to increased competition, prices have fallen significantly in the market, making it somewhat unsustainable. 

“At this point, we are waiting to see what the reinsurance prices will be. About six months back, the reinsurers had raised prices, and the new product that we launched was according to the revised prices. We will look at the increased prices and take a call on raising the rates of term plans,” said Karthik Raman, chief marketing officer and head-products, Ageas Federal Life Insurance.

“I don’t think the increased prices will have a negative impact on the demand for term products. Covid has made people aware of the need for insurance. Understanding and awareness have seen quantum jump in the minds of consumers. That is pushing people to buy term insurance. While premiums will go up, people will not drop the need to buy term covers. There may be a blip initially. Eventually, they will buy,” added Raman.

Term insurance started as a niche category, with a few insurance companies offering it. Consequently, insurers saw the scope of softening the price, so that more people could buy the product. A lot of companies became serious about the protection business because it is margin accretive. They opened up this product to all channels of distribution, such as banks, agencies, and others.

Experts think this current price rise will hold good for at least two years, after which reinsurers might look at changing rates again, depending on the mortality experience.

“This correction should be okay for the next few years. But with one more correction, the industry will stabilise. We may see other reinsurers who have, so far, shied away from coming to India,” said a senior insurance executive.