For a life insurance underwriter, it is very essential that the premium charged from a policyholder is equitable i.e., in proportion to the risk transferred to the pool. Physical hazard plays a major role in designing the premium. In a competitive regime, the premiums charged by different insurers should match each other because of the market forces. In India, despite the liberalized regime, is this happening?
Hazard
is a very important term in the domain of insurance,
be it life or non-life. The textbooks would define
hazard as a condition that may increase the frequency
or the severity of a loss. In view of this, underwriters
take a very close look at the possible hazard of a
risk that is being accepted by them. Hazards are basically
classified into two typesmoral and physical. Moral
hazard is the more complicated of the two as it has
to do with the character of the proposer; has no tangible
quality to it; and as such it cannot be compensated
by charging an extra premium. Hence, underwriters
are doubly careful whenever they see the possibility
of the incidence of moral hazard in the proposals.
Physical hazard, on the other hand, manifests itself
(like, for example, the occupation or the health of
a person) and as such it puts the underwriter on guard
as to whether he would like to accept the risk or
not; or if it is to be accepted, at what rates; and
at what terms and conditions. Thus, there is a great
deal of objectivity while dealing with physical hazards,
at least apparently. It is a universal phenomenon
that the mortality rates have been improving a great
deal. New techniques of disease investigation as well
as disease intervention are being developed and as
a result, several of the killer diseases of yesteryears
have been totally eradicated. If there is a constant
improvement in mortality rates, it means that the
premiums charged on life insurance contracts should
undergo a downward revision, going by the equitable
premium concept. However, this cannot be accomplished
easily because of the long-term nature of the contracts,
on the one hand and the vast number of contracts that
life insurers enter into, on the other. In order to
compensate the policyholders for this anomaly, life
insurers announce bonus out of valuation surpluses
to the participating policyholders
|
