A non-cancellable insurance policy is one in which the supplier (insurance company) cannot increase premiums or change/reduce the benefit the customers receive for the entirety of the customer’s life or until the customer would no longer like to receive the insurance/benefit. Most often, such a type of insurance policy is related to health, disability, or life insurance. Premiums can, however, rise with age; nonetheless, the increase is predictable.
Non-cancellable policies provide the client with the comfort of knowing they will not need to requalify for the insurance plan in the future if their health were to decline. Most non-cancellable insurance plans go until age 65, where they are then re-evaluated; however, it is not always the case. Some plans extend longer or are re-evaluated sooner, depending on the specific plan being purchased. A non-cancelable insurance policy also makes it easier to plan out future expenses, as the premiums will not change unexpectable.
For example, if a 31-year-old woman purchases health insurance, they will receive coverage for the same price until they reach the age of 65 – unless otherwise agreed upon. Even if the customer were to develop a chronic health condition when they turn 40, they would still pay and receive the same benefit as their 31-year-old self.
A conditionally renewable policy is that which allows the renewal of health, disability, or life insurance if certain specified conditions are met. The conditions can vary drastically and are reconsidered periodically – usually before a premium payment, which can be monthly, quarterly, or yearly.
The policy offers many more benefits to the seller. It decreases the risk associated with a non-cancellable policy and allows for increased premiums if an individual’s health risk were to increase. Conditionally renewable systems usually include age, type of employment, health conditions, etc. The policies also typically come with lower premiums than non-cancellable policies. In addition, the insurer is allowed to increase premiums or cancel the plan in the future if the individual’s risk level were to increase.
Non-cancellable insurance policies can positively benefit the risk-averse buyer. A healthy consumer may want the safety of knowing his policy premiums will not have unexpected spikes in the future. Again, it does not protect against age premium changes; however, these can be perfectly predicted, therefore not adding to the risk for a risk-averse consumer.
Adverse selection occurs when the buyer and seller have different information, ultimately changing their actions and buying habits. A non-cancellable insurance policy reduces the chances of consumers acting on such information. For example, if a customer realized they might have increased health risks in their near future, they might increase their coverage to receive a more generous benefit.
Such actionable information would be unavailable to the actuaries or underwriters and, therefore, would create an unexpected loss for the company. Alternatively, if insurers possess more information, such as regulations restricting premiums from changing, then they may only offer insurance to low-risk individuals.
The above practice is also known as cream-skimming or the act of choosing specific clients over others to maximize profits or reputation, ultimately resulting in adverse effects on society. It is extremely common within insurance companies, as certain demographics and customer segments provide significantly higher returns and lower risk. However, cream-skimming is widely considered immoral, and in many places in the world, there are regulations in place to prevent this business practice.
A non-cancellable insurance policy is often used interchangeably with guaranteed renewable policy or guaranteed renewable insurance. There is, however, a small difference.
Guaranteed renewable premiums can increase over time if the change in premiums affects many policyholders. It can put the customer at risk when they are considered a more significant liability, and they can potentially lose their coverage when they need it most. That is why it is often recommended to get coverage that is both non-cancellable and guaranteed renewable.
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