In today's Finshots we see how Covid is pushing term insurance premiums higher.


The Story

Before we get to the heart of the story, a brief introduction on “term life insurance.”

Now, most people think of these as investment products that just happen to extend the benefits of insurance as well — Like ULIPs and Endowment policies. They’ll hope to invest some money over a period of 5 or 10 years, and get the invested corpus back when the policy matures — obviously with some extra money on top. They’ll also expect a large lump sum to be paid to their nominees in the event they die during this period.

So in summary, there’s a common misconception that all life insurance policies extend the benefits of investment alongside life protection.

However, term insurance policies don’t work that way. There’s no investment component here.

You pay your premiums over a period of 30, 40 years and you will never see a single penny in your lifetime. The only thing you could expect to see is life protection i.e. if you were to pass away, god forbid, your dependents are likely to receive a large corpus in your name. And while at first sight, this may seem like a rather poor alternative, it’s perhaps one of the most useful financial products out there.

See, while those other products promise to offer you both investment opportunities and life protection, they rarely ever do a good job on both fronts. In most cases, they offer paltry life coverage (10–20 lakhs) and offer returns that pale in comparison to direct mutual funds for instance. Now think about that for a moment — Is your life worth a measly ten lakhs? Do you think you could really lock up your money for 10 to 20 years and expect returns that even fall short of fixed deposits sometimes?

It’s an absurd proposition at best.

Term insurance policies meanwhile will offer you a sum far greater than the 10 lakhs we quoted earlier for a relatively nominal fee. Sure, there’s no investment component, but in your absence, your dependents will receive a corpus that will help them navigate the next 20–30 years of their life without much hassle. And even though you may not live to see the benefits yourself you can rest easy knowing that you’ll have covered most bases. Which is why more Indians are now taking to term insurance products than ever before.

And this brings us to the story today. Since Covid made landfall, demand for term insurance products has been on the rise. However, elsewhere, Covid has also changed the risk landscape. With so many claims cropping up over such a short period of time, life insurers are evaluating if they need to rethink their pricing strategy. And they’re having to expedite this process because there’s added pressure from their insurers or otherwise called as reinsurers.

The thing is — Life insurance companies in India and elsewhere have to set aside a small sum every time they insure an individual. After all, you wouldn’t want to run out of funds in the event of mass casualties. But if insurers don’t have the financial muscle power to set aside large sums of money, they could transfer some of this risk to reinsurers — who will bear a part of the downside for a small cut in the premium. And unlike insurance companies that can rely on reinsurers, reinsurers can’t rely on anybody else if things went wrong. They are the last line of defence and they have to have sufficient funds at all times. However, with Covid wreaking havoc across the world, some of them are seeking a higher cut from insurance companies — especially their Indian clients.

Because prices in India have remained relatively low despite the fact that we don’t have the most sophisticated industry out here. Insurance companies have little information on prospective customers and they lack the data needed to adequately gauge risk. Ideally, our premiums should have been way higher considering most insurers are walking blind. But that hasn’t always been the case and this anomaly has persisted for a while. However, now that reinsurance companies are finally tightening the screws (and they've been doing it for a while now), the anomaly might disappear.

And that means term insurance prices in India may also rise considerably (10-30%) over the next few weeks once again. Sad!

Also, we have a small announcement to make. Over the past 8 months or so, we have been running a side gig at Ditto Insurance — trying to simplify insurance for the masses. Some of you may already be privy to this little detail, but we believe that most people reading this newsletter may not be intimately familiar with what we do.

And we intended it to be this way. When we started Ditto, we had about 10 people on the team and a threadbare product. With that kind of manpower, there was no way we could aspire to do the things that we envisioned. However, as of today, we have 70 people on the team and a reasonably polished service offering. And if this thing works out, we could keep Finshots free forever and in all honesty, do so much more with the brand — Personal finance and that sort of thing.

So yeah, here’s the pitch — If you are looking to buy a term policy, or any insurance policy in general, do talk to us at Ditto. We come with a spam-free guarantee and we will try to answer your queries free of cost — even if you don’t buy insurance from us. No pressure at all.

Until then…

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