Analysing India’s Insurance Persistency Ratio – A Problem We Need to Fix Urgently

Sep 30, 2018 | 3 months ago | Read Time: 4 minutes | By iKnowledge Team

A high persistency ratio ensures that policies do not lapse. This is important in ensuring a steady insurance coverage for India’s citizens.

Fix India's Insurance Persistency Ratio - Aegon Life

When Mohan set out to start his first full-time job, riding high from the benefits of being independent he signed up for an insurance policy that provided him high cover, but more importantly, had higher premiums. A year later, even Mohan had higher expenses, he began defaulting on his insurance premiums until the policy finally lapsed. The story of Mohan is the story of many Indians who take on policies with premiums that are not aligned to their financial profile, or because they simply de-prioritise insurance in their financial portfolio.

A major consequence for this low rate of policy renewal is a low insurance persistency ratio across the country, a problem that has been plaguing the insurance sector in India.

Life Insurance Penetration - Aegon Life

Source: Boston Consulting Group

What is India’s insurance persistency ratio and why does it matter?

In the insurance sector, persistency ratio is perhaps one of the most important metrics, as it shows how many policyholders stick with their policy after the 13th, 25th, 37th, 49th and 61st month. For 2015-16, as per information provided by the Insurance Regulatory and Development Authority of India (IRDAI) the average persistency ratio for insurance policies in India in the 13th month was only 61% as compared to the global average of 90%. The figure gets even more worrying when we look at the 61st month rates where two-thirds of the policies in India lapse, while globally 60% are retained. Low persistency ratios are concerning as insurance is a long term product. Apart from the effect on insurance companies, for the policyholder themselves the loss of coverage means a reduced return if any from their investment, higher premiums for future policy, as well as complete loss of coverage and benefit for any premiums already paid.

Un-Insuring - Aegon Life

Source: LiveMint

How can the persistency ratio be improved in India?

The first step to solving India’s persistency ratio problem is to understand the key lapsation challenges faced by insurers. As per a report produced by Auseur Analytics about insurance penetration in India, the low rate of penetration in the country is due to a combination of factors including the macroeconomic environment in the country, type of insurance products sold, size of policies sold, age and gender of policyholders, policy duration, as well as factors such as interaction between insurer and policyholder and the satisfaction with service.

Given this, certain key steps can be taken in the insurance industry to address this problem. Firstly, there is a need for all insurers to ensure that all the customers have a thorough understanding of the product they are signing up for. If the customer understands the product well and is satisfied with the policy they are signing up for, they are very likely to renew it for another year, thus, avoiding lapsation. Often, insurance agents are focused on generating commission from selling policies and do not care about whether the premium for the policy will be feasible for the policyholder. As showcased by a study conducted by LexisNexis, 76% of consumers rely solely on agents to learn about insurance policies before purchasing one, making them the critical point of contact between the policyholder and the company.

Thus, it is important for insurers to promote a variety of policies, in particular, term insurance policy, which offers high rates of coverage at low rates of premium. An example of the same would be the iTerm Plus plan offered by Aegon Life, which guarantees the benefit of being an investment for the future of the policyholder, but at adjustable and low rates of term insurance premium. The policy offers coverage till the age of 80, and also ensures you have critical care against 36 major illnesses. Plans such as this which provides coverage at low premium rates are critical to improve the insurance mindset of India, whereby, insurance is still looked at as a tax-saving instrument rather than a tool which can protect your and your loved ones finances.

Hence, we see that the problem of persistency has been plaguing the insurance industry for a while and is deeply entrenched due to problems in customer service, agent’s policy selling techniques, commission structure, and availability of products.

Things are improving however. Self-service, online purchase of insurance is increasing in popularity, driven by firms such as Aegon Life that are primarily online focused. This is helping transform insurance from a push into a pull product. Instead of agents convincing customers to buy policies, the customers are doing their own research and purchasing policies online. Such customers are more motivated to ensure that the policies do not lapse, which will lead to a gradual improvement in this metric.

II/Sep 2018/4431


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