LIC sees improvement in persistency ratios

Overall, persistency ratio of insurance policies from the fourth year onwards is becoming a concern area for life insurance companies.

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Life Insurance Corporation of India (LIC) has seen an improvement in its persistency ratios for the year ended March 2016 as compared to the previous financial year.

Persistency refers to the ability to keep renewing a customer’s policy till it reaches maturity. The higher the persistency rate, the higher the renewal premiums. There is a lot of emphasis on higher renewals.

Overall, the persistency ratio of insurance policies from the fourth year on is becoming a concern area for life insurance companies. While insurers have been able to improve the 13th and 25th month persistency, getting customers to stay invested beyond the fifth year has been an issue.

On an average, persistency for all hovers at 30-40 per cent for the fourth year. From the fifth year on, it has dropped to below 30 per cent. However, LIC has seen a rise in the  ratio for the 25th month, from 51 per cent in FY15 to 60 per cent in FY16, by number of policies. By annualised premium, it went up to 72 per cent from 68 per cent.

Its 37th month persistency stood at 65 per cent for FY16 by annualised premium, similar to 2014-15. By number of policies, it was at 48 per cent in FY16 as compared to 49 per cent in FY15. After four years or for the 49th month, the persistency by annualised premium went up to 62 per cent from 60 per cent. By number of policies, it was flat at 47 per cent. Similarly, for the 61st month (after five years), it stood at 44 per cent by number of policies in FY16, similar to FY15. It went up to 55 per cent from 51 per cent by annualised premium.

Earlier, there was a fixed formula for deciding on agent performance, based on persistency. However, due to several agents moving out of the system, the Insurance Regulatory and Development of India later said insurers could decide their own persistency measures, to retain agents.

In its earlier persistency guidelines issued (and subsequently revised) in 2011, the regulator had said for all renewals prior to FY15, the average persistency rate for each agent for 2011-12, 2012-13 and 2013-14 should be at least 50 per cent, in terms of the number of policies procured by such an agent.  

It had said from FY15, the persistency rate for each agent shall be at least 75 per cent in terms of both policies and premium procured. Further, this stipulated rate requirement was to be effective for all corporate agency renewals due from July 1, 2014. However, this was done away with after it was decided that each insurer could decide on this rate.

It said after September 2010, when commissions on unit-linked insurance plans were capped, insurance sales immediately moved towards traditional plans that continued to pay high commissions. Further, it was found that agents overwhelmingly recommend products which provide high commissions and are unsuitable for customers.

Insurers say apart from mis-selling complaints, due to which renewals are low, orphaned policies due to agents quitting the sector is also a reason why persistency remains low.

According to provisional data from the Life Insurance Council, collection of new premiums was Rs 1.38 lakh crore for FY16, compared to Rs 1.13 lakh crore in FY15. Here, LIC posted a 25 per cent growth in first-year premiums and collected Rs 97,674 crore in FY16 as compared to FY15. Private insurers saw an 18 per cent growth and collected premiums of Rs 40,983 crore.