One of the great challenges facing insurance companies in the future is sustainability.
An insurance policy, in it’s purest form, is a risk transfer contract and an insurance company has a fairly simple role. Collect premiums from policy holders, and pay benefits to those policy holders when they have an incident that fits within the definitions of their policy.
In the incidence of a house insurance policy, you get to transfer the cost of rebuilding your home after a fire to an insurance company in return for the payment of a regular premium.
The cost of your insurance premium is directly related to two things. The insured amount which is the cost to replace the item and the risk factors involved in protecting the asset. This could include whether the house is made of weatherboards or brick, whether your home is in a flood prone area or even whether you happen to live in a suburb that houses a lot of teenagers who get trigger happy with cigarette lighters on school holidays.
All of these factors help determine just how much your annual premium is going to cost you. If you live in a quiet, safe suburb on a hill, your premium will be relatively low. If you choose to live in a suburb that has house fires on a regular basis, then you will pay more. It’s one of the ways that insurance companies can make payments to their policy holders while ensuring their own long term viability.
And so it goes with Life Insurance. No matter the political or social intentions of the day, it is a fact that we all carry different levels of risk of dieing or becoming permanently disabled . If you’re overweight to the point of being clinically obese, then you are statistically more likely to die prematurely than someone who is fit and healthy. If you spend your non working hours consuming large amounts of recreational drugs or engaged in high risk, adrenalin fueled activities such as motor racing then you are statistically more likely to die than someone who spends their weekends playing at the beach.
If you carry a higher risk, then accordingly, you should pay a higher premium for your insurance. Or, if the risk of that activity is too high, then other policy holders shouldn’t have to pay the price of your personal choices and you should be excluded from obtaining cover for that activity.
Unfortunately, we did not choose whether we were going to be born as a male or a female but insurance companies have decades of statistical data that shows the risk differential between the two sexes at various ages and have priced their life insurance policies to show it. It’s a statistical fact that a 19 year old male is more likely to die as a result of a high speed car accident than a female of the same age and so insurance premiums reflect that risk for both parties.
A recent decision by the EU (European Union) to ban gender based premiums is a wrong move despite it’s grand intentions. We’re stepping onto a very slippery slope here with potential to provide an equal insurance footing for everyone, irrespective of relative risk. Already, one company has increased life insurance premiums for females by 23% to reflect this new ruling. Expect higher premiums for everyone if this way of thinking continues. No-one likes insurance companies, but if we lose them because political correctness sends them broke, there’ll be a lot more families living on the street.
Have you recently reviewed your life insurance? Is it time you did?