Load factor in insurance

Amit Sharma had taken a mediclaim policy a few years ago from an insurance company of repute and he also seemed very much satisfied with that policy till sometime back. The reason being that the insurance company had readily honoured his claim for medical expenses, which he had incurred last year for undergoing a sudden heart surgery. However, Sharma got the shock of his life when he tried to renew his policy in July this year as his premium had gone up substantially. When he inquired further, he was told that was because of something called 'loading'.

Now loading was something which he had never heard in his life. Like Sharma, many of us are not aware of the presence and purpose of 'loading' in insurance and its affect on policy premiums. So, what is loading after all, one may ask? According to insurers, loading is an additional cost built into the insurance policy to cover losses which are higher than anticipated for the company arising from insuring a person who is prone to a form of risk.

Loading as a concept, thus, comes into play when an insurance company is dealing with a high-risk candidate, and is resorted to by insurance companies in cases where the risk to the individual is higher than in ordinary circumstances. This can be due to medical history, a dangerous job, or a hazardous pastime.

Various Types of Loading and Factors Which Affect Premium

Loading primarily occurs in life as well as health insurance plans. In general insurance there is usually underwriting-based loading and claim-based loading. However, after the introduction of Health Insurance Regulations 2013, claim-based loading has been removed from all health policies.

The waiver on claims loading is a major benefit now as insurers cannot charge higher premium based on an adverse claim history in the previous policy year.

Another benefit to the policyholders is that premium can't be changed for at least 3 years, which will bring in consistency in pricing and policyholders need not worry about its increase at least for the initial 3 years.

This means that Mr Sharma's premium possibly wouldn't have increased because of the loading factor had he renewed his policy after 1st October this year.

In life insurance, the amount of your premium usually depends on the amount and term of your insurance and the type of policy you want. However, the main factor that determines the premium is your age.

That is because as age increases, the probability of mortality increases and hence the premium for a 50-year-old person will be significantly higher than that for a 25-year-old person.

Citing an example, he says that in a group if all applicants are absolutely healthy and all are 45-year old, the probability of mortality for all will be the same and hence the premium will be the same for all the persons in the above group. If, however, one of them is obese, then there is a higher probability of damage to the end organs, like brain, heart and kidney, in this person and hence his longevity will be adversely affected. Here the premium charged to this person will have to be higher than the rest, to be equitable to all. This extra premium collected from the adverse life is called loading - medical loading to be precise.

In some advanced markets gender is also considered for pricing. For instance, female lives in the reproductive age groups are considered favorable for insurance due to lesser probability of morbidity and mortality.

Some other factors which may affect the mortality and morbidity include:

> Smoking/contact with tobacco or nicotine in any form

> Various medical conditions in the proposed insured as well as in the family

 > Occupation

> Place of residence

For instance, premiums for smokers can be as much as double the cost for non-smokers due to an increased risk of smokers dying younger.

Also, people living in some countries where political unrest is common or probable have to face residential loading. Occupational and residential loading is usually in the form of a fixed rupee value on per thousand sum assured that the customer buys, whereas the medical rating is an extra premium as a percentage of the basic premium that the applicant pays.

The whole idea of adding a loading, be it medical, occupational or residential, is that life insurance will work only if the premium charged to each individual is equitable and proportionate to the risk that the life brings to the insurer.