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Renewable term assurances with higher premiums

0 votes
asked Oct 17, 2018 in BUS 4027W - Actuarial Risk Management by rohin_jain (1,080 points)

I have read that when you have a renewable term assurance, you do not need to be underwritten again to qualify for the cover. However, I see that the insurer is allowed to increase the premiums for the same level of cover.

First of all, is the above correct?

Secondly, if this is the case, the only reasons I can see why renewable term assurances are beneficial are:

  • The higher premium you are charged, is less compared to a new policy premium (i.e. if you entered the term assurance for the first time at that renewable age). 
  • If you are a completely uninsurable risk at that renewable age, you are guaranteed cover (but perhaps at a much higher premium rate)

Are those reasons valid? Are there any other reasons?

1 Answer

+1 vote
answered Oct 26, 2018 by Natank (680 points)

Hi Rohin

The first statement makes sense to me that your premium would have to increase, when you renew your policy. When you renew, you will be x years older and therefore have higher mortality (ignoring the accident hump). If the cover amount stays the same, this makes the expected claim size higher, therefore the premiums need to be higher.

You have already undergone underwriting when you first took out your policy, so the insurer has some ideal of your mortality (even if underwriting was done 5 years ago). i.e They know you do not have hereditary diseases etc. They can therefore renew your policy without underwriting while still maintaining relatively small anti-selection risk. This offers the benefits of:

  • Decreased admin for insurer (setting up new policies and processing underwriting)
  • Decreased underwriting expenses (medical professionals are expensive)
  • Decrease in time wastage for client and better client experience
  • Increased business levels from clients renewing

They can therefore charge a smaller premium. The only risk is that the clients mortality drastically increased over the last x years and anti-selection from individuals who know they are sick choosing to renew the policy. This can be mitigated to an extent by requiring disclosure of any critical illness before renewal. Regardless, the anti-selection risk is likely to be outweighed by the cost savings from no underwriting.