What is Persistency Ratio and Why Does it Matter?

Jan 04, 2019 | 1 month ago | Read Time: 3 minutes | By iKnowledge Team

India has abysmal low rates in life insurance. Insurance policies lapse due to non-payment of premium, either because people do not want to spend, they have forgotten about it or they move to another insurer.

Nikhita, a 25-year old, employee at an IT company is very forgetful when it comes to financial matters. She makes a resolution to maintain a household budget at the start of every year, but usually abandons it after a few months. She always forgets to pay the instalments into her Public Provident Fund account. Last year, she forgot to renew her health insurance premium on time and had lost the continuity in her cover because of that. Nikitha has also not been paying the premiums on her life cover, for the last couple of years.

And therein lies a tale. Many people do not care to continue to pay their life insurance premiums beyond 1, 2 or 5 years due to a variety of factors. Some of them, because they do not have the funds to spare and others because they are lazy or have forgotten about it.

An insurance company measures the persistency on the basis of customers being retained over a specific period of months, the calculation of which is provided below.

What is Persistency Ratio?

The measure of persistency is through a ratio called as persistency ratio and is expressed as a percentage.

Persistency ratio = Number of policies in force / Total number of policies underwritten[1]

Whatever the reason, the fact remains that persistency ratio in India remains among the lowest, when compared with global figures. The handbook of statistics released by the Insurance regulator, Insurance Regulatory and Development Authority of India (IRDAI) this year has some revealing statistics.

For FY17, the average persistency ratio for life policies a year old was 64.70; for two-year old policies the ratio fell to 53.15, and by the time it was five years old the persistency ratio had fallen to 33.58. We can draw some consolation from the fact that these ratios have improved from what they were in FY14. The comparable figures for that year were 57.70, 56 and 28.55 respectively. In India, the persistency ratios are given for the 13th month, 25th month, 37th month, 49th month and 61st month[2]. Figures for more than 5 years are not published.

Globally, the story is different. More than 90 percent of policyholders renew their premiums after the first year and after five years the persistency ratio is still at a respectable 65 percent[3].

Impact of Low Persistency

One of the obvious effects of low persistency is that individuals who discontinue paying their premiums and have their policies lapse face the risk of having no cover and leaving their families destitute in the event of their untimely death.

This is true in case of life policies and health insurance. People often see no point in paying for medical insurance yearly especially when they see themselves as healthy and there are no pay offs in the short term. The importance of a health cover becomes apparent and glaring only when one falls critically ill and has to be hospitalised. Rising healthcare and medical costs can drain a family’s finances and force them to take on costly debt or monetise assets such as gold or real estate.

Rising instances of cancers and tumours are making a dent in household savings and draining their income. iCancer Inurance Plan by Aegon Life is a policy that provides comprehensive critical illness cover with payouts at various stages of cancer. A wide range of cancer types are covered under this plan, even the rare ones. There is flexibility in premium payment, so investors can opt for monthly or annual payments to regulate their cash flows. 

From the point of view of the insurer, the most direct impact is on the profitability of the company. Persistency levels lower than 80 percent hurt the bottomline of the company. When policyholders stop paying their premiums after a few years, the total expenses of the company are spread over a narrower base, raising the cost for the policyholder.

When people buy life insurance they expect some minimum amount of service from the company with whom they are insured. Low persistency is also an indicator of the dissatisfaction of policyholders with the insurer, with its products, after-sales service, customer service interactions etc. Customer service executives and insurance agents (who have sold the policy in the first place) need to reach out to policyholders periodically in order to assure them of their continued service and care for their requirements.

Consistently low persistency levels or fall in the ratios should serve as a wake-up call for the insurer to look at its products, services and client interactions and find out ways to improve itself on all parameters.

II/Dec 2018/4704

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