What impact do premium payment mode and price sensitivity have on underwriting?

• A. Payment mode (annual, semiannual, quarterly, monthly) influences premium affordability and can affect lapse risk and the appropriate rating.
• B. Payment mode has no impact on underwriting.
• C. Payment mode only affects commissions.
• D. Payment mode determines the policy term.

Answer: (A)

In underwriting, how the premium is paid and how sensitive a client is to price affect persistency and overall risk. The mode of payment changes how much is paid in a given period and the total annual cost. Annual or single payments tend to be more affordable over the year and have lower lapse risk than frequent installments, which add cash-flow pressure for the policyholder. If someone is highly price-sensitive or has irregular cash flow, they’re more likely to lapse if premiums are frequent or if the cost rises, so underwriters consider this persistency risk when pricing or rating the policy.

This means the payment mode can influence the appropriate rating or premium structure to balance affordability and lapse risk. It’s not just about mortality or commissions; it’s about ensuring the policy remains in force and the pricing reflects the likelihood of continued premium payment. The other options ignore the impact of payment structure on affordability and lapse risk, or misstate its effect on underwriting.