Beyond policy sales: Insurance companies must prioritise customer retention

Rising life insurance policy surrenders highlight weak policy persistency, underscoring the need for reforms focused on better products, sales practices and consumer retention

The Union government recently informed Parliament that premature surrender and withdrawal of life-insurance policies had overtaken maturity payouts, underlining a worrying trend in India’s insurance market. Surrender and withdrawal payouts accounted for 39 per cent of the benefits paid by life insurers in 2025-26, up from 32 per cent in 2021-22, while the share of maturity benefits fell from 48 per cent to 37 per cent over the same period. In absolute terms, surrender payouts rose sharply from ₹1.58 trillion to ₹2.8 trillion in four years, even surpassing maturity payouts. These numbers point to a fundamental weakness in policy persistency, which is a key indicator of whether customers continue paying premiums and retain policies until maturity. The reasons are neither new nor difficult to identify. The Insurance Regulatory and Development Authority of India (Irdai) has attributed early exits to unsuitable products, unaffordable premiums, mis-selling, poor understanding of insurance products, unrealistic expectations, and changes in policyholders’ financial circumstances. Together, they suggest that the challenge is not merely one of consumer behaviour but also of product design, sales incentives, and financial literacy. Insurance is meant to provide long-term financial protection. A market where an increasing share of customers exits before policies mature raises questions about whether products are meeting consumer needs in the first place. 

The trend is particularly significant because it comes just as the insurance sector is undergoing a regulatory overhaul. Following the Sabka Bima Sabki Raksha Act, Irdai has announced reforms aimed at making the sector more attractive for investment while strengthening consumer protection. Measures such as the mandatory tagging of the authorised salesperson to every policy, the creation of a Policyholders’ Education and Protection Fund, perpetual registration for intermediaries, and greater accountability in insurance distribution are welcome steps. They should improve transparency, strengthen grievance redress, and make it easier to identify responsibility in cases of mis-selling. In the context of the development of the sector, investment and ownership norms have been liberalised to support capital inflows after the increase in the foreign direct investment limit to 100 per cent. Recent regulations governing share transfers, however, have raised some concern because they might require prior permission even for a small change in holdings. This could discourage foreign investors looking at the Indian market afresh, and increase complications with financial implications. 

However, for the consumer, the next phase of reform should focus on improving policy persistency rather than merely expanding policy sales. The long-awaited commission framework should reward long-term policy retention instead of front-loaded sales. Insurers must strengthen suitability assessments before policies are sold, simplify product features, improve disclosures, and invest in post-sale servicing so that policyholders remain engaged throughout the policy term. Ultimately, the success of India’s insurance sector will be measured not by the number of policies sold or the amount of foreign capital it attracts but by whether policyholders remain invested long enough to receive the protection and savings benefits that insurance is intended to deliver.