Persistency beyond fourth year remains a challenge for life insurers

Persistency ratio of insurance policies from the fourth year onwards is becoming a concern area for life insurance companies. While insurers have been able to improve the 13th and 24th month persistency, getting customers to stay invested beyond the fifth year has been an issue.

Persistency refers to the ability to keep renewing customers’ policy till it reaches maturity. The higher the persistency rate, the higher the renewal premiums for the company.

Anoop Pabby, MD & CEO, DHFL Pramerica, said for the industry, persistency goes down to less than 30 per cent at end of the fifth year and there is need for introspection. “That is not a sustainable business. More commitment is needed to keep customers and business on books,” he said.

On an average, persistency for all life insurance industry hovers around 30-40 per cent for the fourth year. From the fifth year onwards, it has dropped to below 30 per cent, as per industry-public disclosures.

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

In its earlier persistency guidelines issued (and subsequently revised) in 2011, Irdai 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 by such agent. Further, this stipulated persistency rate requirements was to be effective for all corporate agency renewals due from July 1, 2014. But this guideline was done away with after it was decided that each insurer could decide on this rate.

Amitabh Chaudhry, MD & CEO, HDFC Life, had said after the end of the fifth year, there are less than 35-40 per cent policies that are in force in insurance companies.  Even a committee headed by former finance secretary Sumit Bose for rationalising distribution incentives in financial products and curbing mis-selling of such products, said higher commission in some products would have led to misselling impacting persistency.

It said post-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 insurance agents overwhelmingly recommend products, which provide high commissions and are unsuitable for customers.

“A manifestation of this is the low persistency of policies in India. Persistency tracks the behaviour across time of policies sold in a year. The 13-month persistency rate for insurance companies ranged between 41-76 per cent in 2013-14,” the committee report said.

While insurance companies say they have varied rewards-and-recognition mechanisms for boosting persistency, they have added that additional training is now being emphasised on for selling right.