State-run term insurance scheme — Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) — has become a loss-making initiative for insurance companies as several life insurers are unable to secure reinsurance support for the scheme. With high claims and little or no reinsurance, life insurers are increasing reserves under this product.
Insurers take risk covers, referred to as reinsurance, for protection against financial losses from large projects or state-sponsored schemes.
“We have been struggling to secure a reinsurance cover for PMJJBY, but were unable to do so. Due to this, reserves for this business had to be increased by 30 percent,” said the chief executive of a bank-promoted life insurance company.
According to data from the Department of Financial Services that overlooks the insurance scheme, death claims worth Rs 1,841.78 crore have been paid as of April 23. There were 92,089 claims disbursed under PMJJBY.
Banks, especially those in the public sector, had been mandated to sell the term insurance product that was sponsored by the government. PMJJBY was offered to customers through an auto-debit facility. Also, banks cannot deny a cover to an individual as long as the premium is paid.
“Getting reinsurance has been a challenge since the claims filed have been high. At this stage, an increase in the premium is the only way to make it sustainable,” said the head of distribution at a mid-sized private life insurer.
However, the premium cannot be revised in the middle of the policy term. Any tweaks in the premiums can be made only from June next year. General elections will be held in April/May next year and any change in premiums will be implemented by the new government that takes charge in June next year.
Sources in the reinsurance sector said they will only be able to offer partial support since it is a risky business. Both the Indian and global reinsurers were initially offering covers to insurance companies for the scheme.
PMJJBY is an annual renewal protection policy where the family receives Rs 2 lakh in case of the policyholder’s death during the one-year tenure. For this, they are required to pay an annual premium of Rs 330, which hasn’t been increased ever since the scheme was launched three years ago.
Unlike the traditional business, where a proper verification of the individuals are undertaken, in PMJJBY policies, there is an auto-debit facility where the premium is deducted from the bank account once a customer opts in. Once a policy is issued even if a fraud is detected, a policyholder cannot be barred from renewing the product.
For instance, a private life insurer had a case of an insurance policy being taken in the name of a dead person, because his bank account was still active. When the claim was filed, the insurer found out that the person had died long before the policy was purchase. The claim is still under investigation.
However, sources told Moneycontrol that being a low-ticket product, insurers are not in a financial position to undertake detailed investigations into all claims filed.
Unlike other insurance products where suicide has a 12-month waiting period, PMJJBY has only a 45 day waiting period for death due to cases of suicide and murder.
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