Technology Can Help Solve One of the Largest Problems in Life Insurance in India: The Persistency Ratio

Jul 07, 2018 | 4 months ago | Read Time: 4 minutes | By Manan Vyas

Persistency Ratio

The persistency rate or ratio is perhaps one of the most important measures for the life insurance industry as unlike other industries customer retention for a period of 7-10 years is critical to enable companies to earn profits from customers. This retention is measured in terms of the persistency rate also defined as the percentage of policies renewed every year. However, due to the changing climate in the insurance industry worldwide, high policy lapsation rates have been observed worldwide, and in particularly in India.

Persistency rates in India vs. Global rates

According to the Insurance Regulatory and Development Authority of India (IRDAI), in 2015-16, the average persistency rate for life insurance policies in the 13th month was just 61%. Globally, the persistency ratio is around 90% in the 13th month and over 65% after 5 years, while the acceptable persistency rate in life insurance is 80% for policies that are 3 years old and 60% for 10-year-old policies.

After the IRDAI issued stringent licensing guidelines and persistency norms to protect policyholder interests in 2010, there has been a problematic persistency trend for insurers. According to a report published by consulting firm Capgemini entitled, “Persistency Management Framework for Life Insurance” due to these new norms there was a high turnover of agents as well as a huge reduction in the number of corporate agents due to the time, money and resources involved in training and appointing them. According to a survey conducted by data aggregation firm LexisNexis Risk Solutions aimed to study about patterns in the Indian insurance sector, about 76% of customers solely depend on agents to learn about products and a large proportion of those who buy insurance state they are unsure whether they have bought the right insurance for them.

Buy a Life Insurance Online

“With large numbers of consumers unsure if they’ve been sold the correct life insurance policy for their needs, this points to a trust deficit in the way insurance is sold, and the information given, contributing to an insurance awareness gap,” the study highlights. This makes it clear that there needs to be a new framework, especially given the infusion of technology in the insurance sector to reverse this trend of wide spread lapsation in the life insurance industry.

What drives low persistency ratios?

There are several glaring issues in policy management undertaken by insurance companies that continue to cause policy lapses. One of the most important ones being the lack of need based selling. As highlighted by the LexisNexis study there is an overall dissatisfaction and lack of trust amongst customers about the insurance policies they are buying, which means that they don’t believe they have invested their money in the right product, making them weary of renewing their policies. Customer segmentation and needs-based analysis are critical in ensuring right products are sold to right customers, and this will minimize lapsation.

Similarly, another driver is the lack of identification from the insurance company about the changing needs and financial circumstances of customers. This combined with improper tracking of replacement policies, limited reminders for premium payments, and the inefficiencies in replacing orphan policies are universal issues that have prompted this downward trend.

Persistency Rates

What can be done?

However, the good news is that both the Indian consumer and Indian insurance companies are willing to change and adopt technology to eliminate these inefficiencies that prompt low rates of customer retention. A study conducted in 2016 entitled the India Consumer Insurance 2016 study* by LexisNexis Risk Solutions India, highlights the positive response of India consumers to using mobile applications and other digital mediums to buy and coordinate their insurance products, as the main trust deficit that currently exists is due to the fact that most people (51%) think these policies are difficult to understand.

Better product design and a seamless customer service experience along with personalised products are the key to ensuring lapsation rates in India will be reduced. Due to ability of big data to predict and analyse consumer preferences and tastes effectively, insurance companies can design products and policies that are not only cost effective for consumers but are also designed to match their needs perfectly. This can also be done before sales by mapping out demands in the market and strategising making, it profitable for insurers as well.

The Persistency Management Framework

Perhaps one of the key most important developments to help solve the persistency problem would be the introduction of a seamless digitised and easy to understand customer service experience. With the advent of digitisation there is a possibility for seamless integration of claims and underwriting processes which are currently viewed by customers as being a huge “hassle” and “complicated.” Additionally, customers today are “omni-channel” and prefer to use various mediums to communicate and avail customer services, making it rudimentary for insurers to provide multiple channels to address their requirements quickly.

Digitisation and improving the current framework of customer service in the life insurance industry is of paramount importance to insurers as this will help in reducing lapsation and also improve profitability and customer satisfaction. While a key focus in the Indian insurance industry has always been to “sell more” policies, customer retention has stood neglected and costs about 80% lesser than obtaining new customers. Introducing a more user friendly and digital approach to obtaining and renewing life insurance is a need of the hour, and will ensure the survival of the industry.


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