India’s life insurance sector experienced a significant slowdown in revenue growth during the recent economic downturn. Life insurers are now focused on improving profitability and achieving break-even as early as possible.
One of the key drivers of profitability in life insurance is “persistency” of the existing base of policyholders, a metric that reflects the proportion of policies that continue to generate renewal premiums.
In recent years, several life insurers have experienced declining persistency levels as an increasing number of policies are classified as “lapsed”. According to the latest figures from the Insurance Regulatory and Development Authority, the proportion of lapsed policies for insurers in the private sector increased from 20% in FY2006-07 to 23% in FY2008-09 with lapse ratios of individual firms varying from 4% to 59% in FY2008-09.
From a consumer’s point of view, a lapsed policy (or a prematurely surrendered policy) can result in a financial loss and denial of death benefit in case of a claim. For life insurers, declining persistency levels typically result in increased pressure on revenue as well as reduced profitability. However, it is a difficult issue to address for most life insurers across the world. Persistency levels are affected by several factors including the economic environment, product design, quality of the initial sale, a customer’s experience with the insurer, and the renewal and premium collection practices.
Life insurers worldwide have come to realize that there are no quick fixes to address the issue. Leading insurers typically take a number of steps to understand and address the root causes of declining persistency. These include:
1. Measuring current persistency at a granular level, resulting in a better understanding of the problem. For example, a leading life insurer is able to measure current persistency levels by sales channel, geography, product, customer segment and duration of a customer relationship.
2. Identifying root causes of low or declining persistency, which in our experience can include poor unit-linked insurance product performance, mis-selling by agents, poor customer service at the call centre, inadequate customer contact information and lack of robust renewal and collection processes.
3. Identifying high-priority areas using analytics models, which may include a customer segment in a specific region, agents with tenures less than one year, customers with premiums below certain thresholds, among others. The chart shows how an insurer can use analytics to prioritize and focus efforts to boost persistency.
4. Developing specific actions to address root causes of declining persistency. A leading life insurer initiated a number of internal initiatives across various functions aimed at eliminating serious and chronic issues around customer service and collections.
Some of these initiatives were tested with groups of policyholders to confirm the expected financial impact before the actions were rolled out across the entire base of policyholders.
5. Implementing actions and sustaining impact. Diamond’s experience with insurers suggests that poor execution capabilities of insurers may constitute the biggest roadblock to improving persistency.
High levels of agent and employee attrition as well as poor execution and monitoring capabilities can undermine the impact of persistency improvement programmes.
Life insurers need to view their persistency improvement efforts as a comprehensive programme that encompasses the entire organization. Insurers who have successfully addressed challenges around persistency appear to adopt the following practices:
1. Create board-level sponsorship for persistency improvement and make it part of the top-management agenda.
2. Set up a dedicated persistency task force with cross-functional representation from functions such as marketing, operations, distribution, information technology and finance.
3. Invest in the right technologies to enable the persistency task force to adopt an analytical approach and to address the persistency problem at a granular level.
Improving persistency benefits everyone—policyholders, insurance agents, employees and shareholders. For a policyholder who has invested hard-earned money with an insurer, the need to reduce risk or generate decent returns (or both) is an important aspect of financial planning and well-being.
For life insurers, an increase in persistency can result in significant revenue increases. Our analysis of FY09 industry metrics indicates that each percentage point increase in persistency across all insurers can result in more than Rs1,350 crore of additional revenue. Life insurance firms in India would be well advised to turn their attention to this key metric.
Govind Balan is a principal and Vinod Nair is a partner at Diamond Management and Technology Consultants Inc. Both are based in Mumbai as part of Diamond’s India practice. Comments are welcome at firstname.lastname@example.org