As insurance payouts rise, so could your premiums

Published in Mint, on 10th April 2017
From this financial year, your insurance agent is eligible to get a higher payout for selling you a policy, but did you know that this may increase your premium as well? Last month, the Insurance Regulatory and Development Authority of India (Irdai) in a series of circulars has allowed life and non-life companies to increase their premium from April.
The regulator feels that the new regulations may trigger insurers to revisit the pricing. To accommodate that, it has allowed insurers to adjust premiums by up to 5% without having to re-file the product. “In order to provide them relief from filing products on account of new regulations on commissions, we have advised them that if the change in premium rate is going to be plus minus 5%, the insurer can simply inform Irdai,” said Nilesh Sathe, member life, Irdai. In the case of non-life products, the hike in premium would be applicable on renewal as well, as these are typically annual contracts, but insurers again needn’t re-file for adjustments up to 5%. “So if an insurer needs to revise the premiums on account of extra pay-outs, the regulator has made it operationally easy.They just need to give a certificate to the regulator stating clearly that the hike is only due to the increase in payouts,” said Antony Jacob, chief executive officer, Apollo Munich Health Insurance Co. Ltd. Does this mean you pay a higher premium? Perhaps not immediately, and not much.
New pay-out structure
Life insurance follows a front-loaded commission structure—the first year commission is largely unchanged. However, Irdai has introduced the reward system that can be paid in addition to the commissions, to encourage distributors to clock-in more sales. Now insurers can offer a maximum ‘reward’ of 20% of first-year commission and this increases the total payout in the first year to a peak rate of 48%.
In case of health insurance, there is no hike in the commissions as such. “If you factor in the rewards of 30% of the commissions, the total pay-out from each policy comes to 19.5%. So the extra 4.5% pay-out can be pooled and paid to outperforming agents. The reward pay-outs from policies sold by intermediaries can’t be used to pay the agents and vice-versa,” added Jacob. In the case of motor insurance, the regulations have increased the commissions along with introducing rewards. For a detailed explanation, do read: bit.ly/2oEoCmA.
Will your premiums go up?
Two actuaries that we spoke to say the impact would be marginal. “The commission rates are capped at 35% and the industry has already been paying commissions in this range, so I don’t expect insurers to increase premium rates for new customers,” said Anil Singh, chief actuarial officer and appointed actuary, Birla Sun Life Insurance Co. Ltd.
Another actuary who didn’t want to be named also said the hike at best would be marginal since the increase in payout would get amortised over the premium payment term.
In the case of non-life, according to an Irdai official we spoke to, so far insurers have not shown any enthusiasm to increase the premiums. But, some feel that this opportunity will be taken up by those with poor combined ratios. “There are multiple facets to customer acquisition cost, which are segregated into various buckets like commissions, marketing expenses, field sales and infrastructural support. Companies with adverse combined ratio may take this opportunity to consider increasing premiums instead of absorbing the additional pay-out,” said Sandeep Patel, managing director and chief executive officer, Cigna TTK Health Insurance Co. Ltd.
“But if insurers focus on rewarding agents and also focus on technology for distribution optimization and efficiency, acquisition costs can be contained without having to increase premiums,” he added. Combined ratio is the expense ratio plus the loss ratio and it indicates a product’s profitability.
As per K.G. Krishnamoorthy Rao, managing director and chief executive officer, Future Generali India Insurance Co. Ltd, retail health could see a hike.
“Medical inflation is about 15% which is not fully factored in…. So the loss ratios go on increasing every year, making it difficult to absorb the costs of extra pay-outs to the distributor. Most insurers will possibly increase premiums for individual health insurance policy. I don’t see any impact on motor insurance as insurers offer discounts on own damage premiums, so they will simply adjust for a higher payout by lowering the discounts,” he said.
But according to Kapil Mehta, co-founder, SecureNow Insurance Broker Pvt. Ltd, motor insurance could see a hike too.
“Third party insurance is mandatory for all plying vehicles…. Increasing commissions and paying rewards may not be required. Moreover, increase in commission and incentives, will be passed on to customers as the loss ratios from third party component is already high,” Mehta said.
Even though the industry is adopting a wait and see approach, you might end up paying a slightly higher premium for certain products.