New disclosure norms expose insurers' policy-retention claims

A new standardised disclosure regime put in place for insurance sector has spilled the beans for life insurers' claims on retention of customers, with many of them being forced to disclose their policy 'persistency' ratios much below the year-ago levels.

Barring a few, such as ICICI Prudential, Reliance Life and Kotak Life, most of the life insurance companies have disclosed lower 'persistency ratios' for the first quarter of the current fiscal ended June 30, as also for the full financial year ended March 31, 2015.

The persistency ratio broadly measures the quantum of the customer retention by the life insurance companies, while determining the percentage of policyholders paying renewal premiums at the end of one year, or more years depending on the tenure of the policy.

However, this has been one of the most abused financial metric by many insurers, who tend to disclose their best possible persistency ratios without following any standard formula or any specific time period.

To remove such ambiguities in reporting persistency across life insurers, the sector regulator IRDA earlier this year made changes in norms for such disclosures and put in place a standard formula to be followed by all companies in reporting their 13th month persistency ratios.

An analysis of the disclosures made by various life insurers so far this year shows that there has been a marked decline in the high level of persistency reported earlier by many companies.

"Such sharp variations are unlikely in the normal course of the business and therefore a decline in persistency would imply a less conservative methodology used for reporting during prior periods while an increase would imply that the insurer's own approach was more conservative," a senior industry executive said.

Amongst the top insurers, many have registered a decline, while persistency ratios for some have remained flat and very few have shown any significant increase.

For ICICI Prudential, the 13-month persistency ratio remained nearly flat at over 71% during the full fiscal ended March 31, 2014, while the ratio for the first quarter ended June 30 rose to 69% (from 65.2% a year ago).