Wave of discounts before regulation? Companies offer 85% discount on risk life insurance in the first year

While the Capital Market Authority is examining the possibility of limiting discounts in life insurance so that they are granted for the entire life of the policy, insurance companies have begun these days to offer an aggressive discount scheme of 85% in the first year, and over eight years during which the discount rate drops to about 30%. Insurance agents who spoke with Polisa harshly criticized the trend. According to them, this is harm to both the insured and the agent. The insureds will enjoy a significant discount in the first year or two, but in the third or fourth year the price will begin to rise sharply, both due to the reduction of the discount rate and due to the increase in age. However, at this stage it is possible that the insured will no longer be able to conduct market research and move to another company – due to a change in health status. From the agents’ perspective, this is a significant harm to commission, since the commission is derived from the premium actually paid by the insured – and when the premium in the first years is lower by tens of percent, the commission shrinks accordingly. In August of this year, the Authority published a draft circular designed to regulate the discount scheme in risk life insurance, so that they are granted until the end of the insurance period. According to the draft, the discount rate set in the policy will not be able to decrease until the end of the period, and any additional discount granted subsequently will become a new floor. In the Authority’s reasoning, two main failures are detailed: first, framing of a short-term discount appeals to the present bias of the candidate for insurance and biases them from a full examination of the cost of the policy over its lifetime; second, in life insurance there are switching barriers resulting from health status, such that an insured whose condition has deteriorated may get stuck with an uncompetitive premium after the cancellation of the discount, without practical ability to switch to an alternative product. However, it should be emphasized that this is a draft circular only, and in the meantime a final circular has not yet been published. In the draft it was determined that the reform would take effect on December 1, 2026, but since a final circular has not yet been published – it is doubtful whether the reform will take effect on this date. It should be noted that risk life insurance is among the most profitable products of the insurance companies. According to the Authority’s data, the loss ratios in this field are characterized by about 50% over recent years. The Capital Market Authority noted in response that the said circular is in the final stages of work and will be published soon.