What is a Conditionally Renewable Policy?
A conditionally renewable insurance policy contains a provision that permits the insurer to not allow a policy to be renewed under certain conditions. A conditionally renewable provision is generally offered to insureds in high-risk occupations and is frequently found in group or association type coverage.
- Conditionally renewable policies are an insurer-friendly policy option, as it allows the insurer greater freedom to cancel, not renew, or increase premiums on a policy under certain conditions.
- Conditionally renewable policies can be contrasted with noncancellable or guaranteed renewable policies, which are a more policyholder-friendly policy option.
- Conditionally renewable policies have lower insurance premiums on average because they offer a lower coverage guarantee.
How Conditionally Renewable Policies Work
The conditionally renewable provision in an insurance policy allows an insurance company to cancel immediately, not renew at the renewal date, or increase premiums on a policyholder under certain conditions. This provision benefits the insurer, not the policyholder. A conditionally renewable policy may be renewed unless the specific conditions outlined in the policy occur.
For example, a conditionally renewable disability policy may not allow a policyholder to renew their disability policy after switching jobs. The insurer may place this condition on the insurance policy if the new job is considered more risky than the prior job. The insurer places this condition on the policy because the increased risk associated with the new job is more likely to result in the policyholder making an injury claim.
Regulators typically outline the conditions in which an insurer can terminate an insurance policy. In the case of health insurance, insurers are not allowed to terminate a policy based on the health of the policyholder. Insurers may offer several different renewal options for the policies that they underwrite, including both conditionally renewable and noncancellable policies.
Conditionally Renewable Policies vs. Noncancellable Policies
On one end of the spectrum are policyholder-friendly options. These include noncancellable and guaranteed renewable policies. These allow the policyholder to continue renewing the policy without changes being made to the contract terms, and do not allow the insurer to add any conditions that may result in the policy being canceled. The premiums for a noncancellable and guaranteed renewable policy do not change during the noncancellable period, and the policy is guaranteed to renew.
On the other end of the spectrum are insurer-friendly options. These include conditionally renewable, cancellable, and optionally renewable policies. These allow the insurer to place conditions that allow the policy to be canceled at any time or not renewed at the next renewal date if conditions are not met. The insurer may increase the insurance premium on the policy if it does decide to let the policyholder renew for another period.
Advantages and Disadvantages of Conditionally Renewable Policies
Under a conditionally renewable policy, an insurer retains considerable power to cut its claims losses by refusing to renew coverage. Because of this ability, such policies generally have significantly lower premiums than either noncancellable or guaranteed renewable coverage. However, the lower premium comes with a consequence for the policyholder in the form of an equally significant reduction in coverage guarantee. Nevertheless, as long as the insured meets the conditions of renewability and remits the required premium on a timely basis, the insurer guarantees not to cancel the policy.