RISING LIFE EXPECTANCY TO HELP LOWER INSURANCE PREMIUM

Mumbai: Life insurance premium rates are likely to drop over the next few months owing to longer life expectancy, with a new mortality and morbidity table expected to be in place by the fourth quarter of 2009 to replace the current one, which is of 1994-96 vintage.

The new rates will include the claim experience of individual companies and will be based on 2006-08 data.

The Mortality and Morbidity Investigating Centre (MMIC), an affiliate of the Institute of Actuaries of India (IAI), plans to publish the mortality table by October. The institute has been working on the table for the last six months.

Data and statistics are currently being collected from various insurance companies though a handful of large players, including government-owned Life Insurance Corporation of India, are yet to submit data, said IAI President G N Agarwal.

With the risk perception falling, premium rates, which are based on mortality rates, are expected to fall as well. “Over the years, life expectancy has increased, mortality has come down drastically and this gives a room for the rates to drop,” said Agarwal, who is the chief actuary of Future Generali India Life Insurance Company, a joint venture between the Future Group and Italy’s Generali.

Agarwal said over the last 12 or 15 years, according to data available so far, mortality rates have come down by 25 to 30 per cent in the higher age brackets, which may translate into a reduction of 15 to 20 per cent in certain segments.

While the impact will be felt most on term covers, unit-linked insurance plans are also expected to see an impact, but only on the insurance component. In the case of endowment policies, the impact is likely to be on bonus payments on certain policies, since 8 to 9 per cent of the premium is linked to mortality rates.

“Term and savings-cum-life endowment (policies) are likely to see a reduction in premiums, while on the other side, rates on annuity products may go up. Insurers have already factored in the anticipated improvement in their mortality table,” said SBI Life Appointed Actuary Sanjeev Pujari.

The new tables are likely to provide data for various product categories and on the experience of individual insurers, since it would be based on the sex, age and geography, among other factors. At present, the tables only provide the mortality rate per thousand.

For instance, according to the Indian Assured Lives Mortality (1994-96), which has been in effect since January 2005, for people who are 40 years old, the probability of their death is 2.053 per 1,000. For 60 year olds, the probability is 13.073 per 1,000, which results in a higher premium.

The new table is expected to provide additional data by classifying customers into various segments on the basis of economic groups as well, making pricing according to their profile possible.

Pujari added that since the industry was opened in 2000-2001, private insurers have enough experience to contribute to the table.

“Some actuaries have been reducing premium rates for life covers over the last few years as life expectancy has increased. I don’t expect the new table to reduce the premium rates drastically,” said ICICI Prudential Life Insurance Appointed Actuary Abhijit Chatterji.

However, actuaries said the new table would be predominantly based on LIC data, since private insurers would not have rates for ages beyond a particular limit. Private sector insurance companies have a relatively younger client base and therefore have data for fewer age groups.

Once the tables are finalised, apart from the industry-wide data, Insurance Regulatory and Development Authority has also agreed to allow companies to decide the premium based on their experience, which would be based on their own tables.

Source: Shilpy Sinha, Business Standard

PSU NON-LIFE INSURERS TOLD TO FOCUS ON UNDERWRITING BIZ

Bangalore: As a prelude to equity dilution, the government has asked public sector non-life insurance companies to shift focus from top lines to bottom lines.

Highly placed sources said that at a meeting with the Union Finance Ministry officials last week, the four non-life PSU insurance heads were told to reduce their reliance on profits from investments, including sale of equities. Instead, they were told to turn around their core business — underwriting — and start generating underwriting margins. Underwriting margin is the difference between claims incurred and expenses and the premium earned. A positive underwriting margin implied that premium earned would be higher than claims.

Underwriting has remained a loss-making business for the PSU insurers. Insurers have instead cross subsidised underwriting losses with investment incomes since nationalisation of the non-life business in 1973. Between FY2005 and FY2008, non-life insurers managed to earn investment profits in excess of Rs 500 crore each on the back of soaring equity markets. In FY09, they were unable to sustain the high investment profits with the meltdown in the equity markets coupled with low yields from government securities.

The sources said the Finance Ministry is now insisting that underwriting incomes be made positive. This would mean containing the expenses as a per cent of the net premium earned. The alternatives would be to increase premiums especially in some of the loss-making portfolios or contain losses through tightening the claims mechanisms. The shift to underwriting profits is necessary for improving valuations as equity dilution in the sector is proposed by the end of this year. The sources said the tightening had already started with the third party motor pool taking off. Under thismechanism, all the insurers — both public and private — are expected to aggregate their motor third party risks. The claims are settled on the basis of their respective market shares.

Rural portfolios
In addition, sources said that insurers propose to expand their premium collections from rural portfolios this year. Rural insurance serves the primary objectives which include expanding insurance penetration in the country and at the same time serving social sector objectives.

Gross premiums in the last financial year from the non-life sector were barely 0.7 per cent of the gross domestic product, making the country one of the least penetrated regions in the world. This is despite expanded private sector role in the insurance sector.

However, insurers’ fascination for the rural sector also stems from the historically low claims of less than 50 per cent. The rural sector, which includes risk cover for households, farm implements and co-insurance with the Agricultural Insurance Corporation for crops, has traditionally had a low claims ratios.

Consequently, the sources said that the profits from rural penetration are also likely to be high.

Besides, they said a correction in premium rates was imminent in fire and engineering risks. This comes, after a steep drop in premiums of up to 70 per cent after deregulation in 2007. The opportunity for the correction was partly on account of the tightening of global reinsurance markets and the tight capital situation for private sector insurers which implied that their ability to undercut risk premiums were limited.

Source: C. Shivkumar, The Hindu Business Line