Poor creditworthiness will cost a higher premium

After banks, non-banking financial institutions and telecom service providers, your financial health may now be available for insurers to scrutinise. The Credit Information Bureau of India (Cibil) is in the initial stages of discussion with the insurance regulator to extend its services for both life and general insurance players.

“This move will help improve financial underwriting of insurance companies and keep a check on the moral hazards to them,” says Arvind Ladhha, chief executive officer (CEO) of Pune-based Vantage Insurance Brokers.

As on today insurance companies do not have access to any data of potential or existing policyholders and all they can rely on is the data or documents provided by the policyholders, which is not always foolproof. To that extent, this will be a great help, feels Ladhha.

The insurability of a potential policyholder depends on two factors — health condition and financial condition (future premium paying capability). Of these, health condition is of prime importance for any kind of individual plan, like life or health insurance. Many don’t even take your financial health into consideration before selling a policy, more so, if the policy is sold by an agent or advisor. As a result, many are sold high-premium plans, which they may or may not be able to pay for long. Therefore, many investment-cum-insurance linked products get lapsed or surrendered. However, this move, say insurers, will push them to take individuals’ financial health also into consideration.

This will help insurers in pricing their products and some say that premiums as well may be impacted.

Says K G Krishnamoorthy Rao, managing director and CEO of Future Generali General Insurance that in markets like the US and the UK, insurers’ creditworthiness is an indicator to assess policyholders’ premium paying ability before issuing a policy in his/her name. “And it has been seen in these countries that those who are regular defaulters tend to make higher claims against their insurance plans. However, in India this co-relation between financial health and claim ratio may or may not exist. Therefore, till we spot this trend through data we can't say if Cibil’s data will impact premiums,” he says.

Some insurers say that availability of Cibil data may make financial underwriting more important than it is today and help not underwrite financially weak policies. There are chances that those with a poor repayment history or huge outstanding may be covered for a small amount. “Say, one wants a cover of Rs 10 lakh but isn't very credit worthy. Then the insurer may offer a cover of only Rs 2-3 lakh depending on the credit history. Or, may not offer policies that charge higher premiums, specially investment-linked ones,” said an insurer.

And those with a very high default ratio may be offered a policy at a higher premium. For such individuals premiums may jump 25-30 per cent, he adds. Typically, a Rs 5-lakh endowment plan charges Rs 20,000-25,000 annually for a 25-26-year-old. Similarly, a pure-term plan charges Rs 4,000-4,500 for a Rs 15-lakh cover. And a health plan may charge Rs 2,000-3,000 for a Rs 3-lakh cover.

“There is no chance of giving discounts to those policyholders who have a good credit history,” the insurer says.

However P Nandagopal, MD & CEO, IndiaFirst Life Insurance feels there is no way an insurer can increase or decrease premiums applicable for a certain amount of cover. “Instead, those with poor credit history may be allowed to buy only single premium or limited premium products,” he believes.