 "Life insurance, insurance")
The persistency ratio within the life insurance industry continues to be low, according to data published in the Handbook on Indian Insurance Statistics for financial year 2020-21. The median 61-month persistency figure for the industry for FY2020-21 stood at 39.4 per cent. This figure has remained in the thirties since 2016-17.
Persistency ratio tells us what percentage of an insurer’s policies are still in force after a certain period of time, say, one, three, four or five years. This figure should be looked up before selecting an insurer. Satisfied customers tend to stay with an insurer for a longer time.
Reasons for low persistency
Several factors are responsible for the life insurance industry’s low persistency numbers. One is that insurance is a fairly complex product. “A large part of the persistency challenge comes in because people buy a product without a clear understanding of their expectations from it. Do they want a pure term cover, or do they want an insurance cover cum investment plan, say, to plan for their kid’s future?” says Manu Lavanya, director and chief operations officer, Max Life Insurance. When products are purchased without understanding their objective, or the financial need they are supposed to fulfil, it leads to disappointment later. Customers then allow such policies to lapse.
Mis-selling is another key reason. Often customers are sold policies without explaining their payment obligations properly. “The customer may think he has purchased a single-premium policy. When he realises he has to pay a premium every year, he abandons the policy,” says Kapil Mehta, co-founder and managing director, Secure Now Insurance Broker.
Sometimes, customers have incorrect return expectations. They compare the returns from an insurance-cum-investment product with a pure investment product, such as a mutual fund. But returns from the two can’t be similar because a part of the premium goes towards meeting the mortality charge (paying for the insurance coverage).
In case of unit-linked insurance plans (Ulips), customers at times take short-term calls based on the state of the market. When the markets are up, they decide to cash out. Such tactical calls may not always be in their best interests over the long term.
Many people carry a bias that “bad things won’t happen to me”. Whenever they become financially stressed, payment of insurance premiums is a commitment such customers don't mind breaking.
In the case of some insurers and products, only the annual payment mode is available. Half-yearly, quarterly and monthly modes are not available. “In cases where these options are not available, insurers witness low persistency due to the unavailability of funds in the policyholder’s account,” says Sanjay Radhakrishnan, chief executive officer (CEO) and principal officer, Hero Insurance Broking.
Customers often buy life insurance policies at the last-minute (before the March 31 deadline) for tax saving. When they do so, they don’t pay adequate attention to the policy features. Later they realise they have purchased an unsuitable policy and hence abandon it.
One operational cause is that customers change the bank account from which they paid their premiums. “But they don’t change the NACH forms. This results in non-approval of renewal premiums,” says Radhakrishnan.
Steps by insurers to improve persistency
The cost of customer acquisition is high in life insurance. It is only when premiums come in for many years that this cost gets recovered. A low persistency ratio also erodes an insurer’s embedded value (the present value of future cash flows). So, insurers too are taking several steps to ensure customers don’t abandon their policies prematurely.
Insurers nowadays try to select the right customers. “Insurance companies, with the help of data analytics, work on selecting people with the right financial profile for their products, so that these customers can meet this long-term financial commitment,” says Lavanya.
They also try to ensure that the customer understands the terms and conditions of the policy at the time of purchase. They use simplified benefit illustrations with graphics that are easy to understand.
Companies also conduct a pre-insurance verification call to ensure that customers understand aspects like the premium they have to pay, the period for which they have to pay it, and the benefits of the product. “Only if the customer fully understands what he has purchased will he be able to answer the questions that are asked in this call. If he has been mis-sold a product, he will fail to answer the questions,” says Lavanya.
When the premium payment is due, insurers remind customers and ask them to make sure that the bank account from which the payment will happen is funded.
In the past two years, when customers failed to pay the premium on time owing to Covid, many insurers waived the late payment charge.
To make it easier for customers to meet their commitments, insurers also give them an opportunity to convert annual premiums into quarterly or monthly premiums.
In some policies, the customer can surrender the paid-up additions to adjust against the premium payment. In others, they can opt for premium offset feature which allows them to offset the bonus against the premium payment.
Allowing policies to lapse harms you
The key fallout of discontinuing a policy is that you lose out on the insurance cover. This can have serious consequences, especially amid a pandemic. According to Ashish Rao, chief customer experience and operations, ICICI Prudential Life Insurance, “Allowing a policy to lapse adversely impacts the purpose and goals for which it has been purchased, like income replacement in case of an eventuality.”
If you surrender a policy, the insurer levies a surrender charge. “These costs tend to be considerable,” says Mehta. If the policy has not acquired a surrender value, you lose out on all the premiums paid until then.
“Customers lose out on benefits like sum assured amount and any bonus pay-outs,” says Lavanya.
In case of term plans, when the customer goes to buy a new policy after allowing the older one to lapse, he will typically face a revised premium which is higher (since he would be older now). “In case of investment and guaranteed income plans the returns are impacted adversely and the risk cover may reduce substantially,” says Radhakrishnan.
Make the right purchase
The key prerequisite for not allowing a policy to lapse is that you buy a policy well suited to your needs. You will then be motivated to pay your premiums and stick to the policy for the long term. This requires that you do a lot of due diligence at the time of purchase.
Do your research and compare the policies available in the market. Nowadays you can do a lot of research online, either at the websites of insurers or using aggregator platforms. “Our digital platform facilitates matching products with the needs of customers,” says Rao.
Research will enhance your understanding of insurance products and enable you to make the right purchase.
Make sure the insurer you buy from scores highly on key parameters. “Evaluate the claim settlement ratio and the average time taken to settle claims before finally making the commitment,” says Rao.
Don’t be in a hurry while making the purchase decision. Sit with the seller and understand the benefit illustration properly: What benefits will you get and at what intervals? Also understand your obligations: How much premium do you have to pay and for how many years?
Before deciding to discontinue payment of premiums, speak to the company representatives. They will explain the costs of discontinuing the policy and suggest better alternatives.
Persistency ratios: Slow improvement
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Source: Handbook on Indian Insurance Statistics
