What is the persistency ratio and why is it crucial to the health of the insurance sector?

Nov 01, 2018 | 1 month ago | Read Time: 3 minutes | By Manan Vyas

While from the outset the words persistency ratio seem like yet another set of financial jargon that are intended to confuse ordinary customers, the persistency ratio is actually a fairly simple, yet very important metric that provides a snapshot of the health of the insurance industry. As per a report produced by the Indian Brand Equity Foundation (IBEF) earlier this year, the Indian insurance industry is expected to grow to $ 280 billion by 2020, and insurance premiums have increased to Rs. 4.6 trillion in 2018. These figures certainly seem to imply a positive picture of the Indian insurance sector, but growth can hardly ever be calculated using such simple calculations. This is where the persistency ratio comes in, which helps us evaluate the consistency and stability of this growth by providing a purview of how long customers will stay with their policies.

Understanding the persistency ratio

If we cut out all the jargon, persistency ratio looks at the number of customers that choose to renew their policies at the end of the year to calculate how long customers are choosing to stay with their policies. The ratio takes into account both the number of policies as well as the premium collected by them. There are different persistency ratios, but the one that is disclosed by insurers most often measures number of policies, by count and premium that continue with them. Thereby, persistency rates show loyalty of customers and how much confidence they have in the products being offered, thereby, providing a clear overview of how stable and consistent growth will be in the industry.

How are persistency ratios important

Persistency rates are important both for the insurer and for customers. For customers most policies double up as investments and it is important for them to be satisfied with a product to enable a high persistency rate, which is the only way they will maximise the benefits of their investment. If customers have to surrender or let their policy lapse, not only do they give up on security, but also lose out a sum of their investment as their policy has been withdrawn before reaching maturity. Additionally, customers that let their policy lapse are harder to sell another policy to as they garner negative perception in the market.

Similarly, for insurers high rates of persistency translate into increased profitability, reduced costs, optimal long-term income and overall growth and development. The key priority for insurers is to find customers that will stay loyal to their policy and their insurer, as this is a major determinant for a build of policy reserves and reduction in policy surrenders.

Image: Persistency trend for major insurers in financial year 2012 in India

 

Persistency in the Indian insurance sector

As per a report produced by stockbroking firm Prabhudas Lilladher about the Indian insurance sector, due to the regulatory changes introduced in the market, persistency rates in India was low in the 2012 financial year for both private and public insurers. However, due to improvement in the quality and types of products available to customers along with a wide variety of distribution channels available, persistency rates for almost all players improved within the next 5 years.

One of the most important persistency ratios is the 61st month rate, as customers are very unlikely to discontinue a policy after 6 years, thus guaranteeing their loyalty, has also seen a very noticeable improvement in the country, reflecting a healthy growth in the industry.

Image: Persistency trend for major insurers in financial year 2017 in India

As per a report produced by Aurerus Analytics agency entitled, “The Definitive Guide for Improving Insurance Persistency in India,” the Indian insurance sector has an average rate of persistency as compared to other markets such as Singapore which record a whopping 99% persistency ratio. This signifies a need to address some major roadblocks in the path to consistent growth and development of the insurance sector. As per market experts some of the key areas of improvement include the improvement of customer understanding of products to enable them to gauge which product meets their requirements entirely before commiting to a policy. Other recommendations also include, aligning product design to a regular Indian life cycle by taking into account major life events such as marriage, higher education, amongst others as well as the standardisation and digitisation of the sales and distribution process.

 

 


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