The Coronavirus pandemic, along with a threat to life, has brought to the fore the core of life insurance – a need to secure the financial well-being of loved ones in case a tragedy hits.
The shift towards protection products is widely visible both in terms of demand and supply.
As of May 2021, the life insurance industry saw a 61 per cent YoY growth in new business sum assured of life insurers.
Pure protection plans are relatively cheaper, and the all-pervasive economic stress definitely makes the cheaper products more attractive to the average consumer.
However, rising claims have forced life insurers to turn cautious towards the pure protection portfolio. Peuli Das, Chief and appointed actuary, IndiaFirst Life Insurance explains that a key feature of pure term insurance is that they are significantly cheaper compared to the benefit or coverage. The coverage you get is often a few hundred times the premium you pay.
This makes it an attractive target for fraudsters – people aiming to make early claims while paying a few low premium instalments. The insurers need to always guard against these threats, with effective underwriting frameworks and stringent due diligence. There is also a tendency towards adverse selection where people with higher life risk and comorbidities would gravitate towards low-cost insurance.
For the sake of appropriate pricing and premium estimation, the customer can expect to face some scrutiny. Firstly, there is financial evaluation – aimed at arriving at the true value of life while considering the customer’s income streams and family needs. Secondly, there is medical screening to identify the critically ill, whose coverage might need to be appropriately structured.
“COVID has created scenarios where an insurer might encourage some ‘good behaviour’ from the customer, like taking the vaccine and responding to the COVID questionnaire,” she adds.
Shift towards Guaranteed income products
With falling interest rates, the rate of interest on bank fixed deposits (FD) has declined from 8.5 per cent in 2013 to 5.4 per cent in 2020. So fixed income instruments such as FDs have now become less attractive among customers especially as they look for guaranteed returns over a longer period of time.
Therefore, guaranteed return products that combine death benefit with guaranteed incomes that are presently comparable to the FD rates are gaining popularity.
Peuli Das expects this trend to continue and stay for the near future. “As general awareness and uptake of guaranteed products increase, people are expected to view them at par with the more traditional alternatives like FDs,” she added.
Increasing demand for group life insurance
Interestingly, the pandemic has also resulted in increased demand in the corporate demand for life insurance cover for their employees. Any conscientious employee-centric organization is required to act in the best interest of their workforce. A comprehensive group policy that can provide the security and peace of mind to the employees is a must for such organizations.
“Group term insurance as part of employee benefit programmes has thus seen phenomenal growth post pandemic.”
IndiaFirst saw a 74% growth in premium amount on group term YoY (as of Mar’21), and one would expect to see the same across the industry, she said.
Additionally, many organizations that were self-financing the cost of cover have started scouting for insurers to whom they can outsource the unforeseeable risk. “The marketplace which was once characterized by price war has now been tempered down drastically and the corporates are willing to pay whatever it takes to safeguard against the increasing risk in near term,” she adds.
Opting for higher cover
The pandemic has also forced individuals to reassess their existing life insurance cover and opt for higher covers. “People who had earlier opted for the basic minimum, maybe driven by an unwillingness to pay higher premium, or discouraged by the cap on associated benefits like tax exemptions, are taking a fresh look at what they truly need to leave behind as a reasonable corpus for their families,” she said.
The other interesting phenomenon is that the wealthier customers, celebrities, and industrialists, are going for very large pure term insurance.
“The likely reason is that COVID has suddenly appeared as a great leveler, putting them at the similar life risk as the common man, in spite of their privileged and healthy lifestyles,” she added.
However, while the demand and awareness for life insurance is on an uptick after the pandemic, it has also weighed on their profitability. Peuli Das says that a life insurance plan is unique from the risk perspective since it is a long-term contract.
A short-term surge in claims dampens short term profitability but does not necessarily turn the business unviable. “The present surge in claims from the second wave is mitigated through future cash flow arrangements – premiums payments and policy renewals, along with effective risk management,” she adds.
Spurred by the crisis, reinsurers are implementing new ways of risk sharing like stop loss arrangements and financial reinsurance to help the insurance business tide over the crisis. Also, with increasing vaccination, the worst is behind the life insurance industry, she adds.