Mumbai: The combination of economic slowdown and mis-selling of policies has hit the Indian insurance industry where it hurts the most—policies worth Rs1 trillion lapsed in fiscal 2009.
They consist of traditional policies such as endowment plans, moneyback plans, term assurance and health insurance plans, but do not include the popular unit-linked insurance plans (Ulips).
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According to the Insurance Regulatory and Development Authority (Irda), around 9.1 million policies lapsed in 2009 and some private sector insurers have shown a lapse ratio as high as 50% or even more.
In fact, for the private players, the value of lapsed policies almost doubled in 2009. About 1.73 million policies of private players worth Rs47,000 crore lapsed in 2009 against 1.28 million policies worth Rs25,000 crore in the previous year.
At the end of fiscal 2009, there were 22 life insurers in India that accumulated a total premium of Rs2.21 trillion, with 291.6 million non-linked policies in force.
Though Ulips account for bulk of the business of private life insurers, the absolute value of the business under traditional policies is significant. The industry is gradually moving towards a balanced mix of traditional policies and Ulips.
Irda has not defined any parameter to measure lapses in the case of Ulips. Any Ulip premium that remains unpaid on a given due date is termed as “premium-awaited”.
One of the reasons behind the high lapse ratio is the slowdown that gripped India in 2009. Reeling under financial stress, many policyholders chose not to renew their policies. But experts also blame “rampant mis-selling” by some private insurers. Many policies were sold without adequately explaining features to policyholders, leading to non-renewal of policies, they say.
Besides, many of the private sector insurers have been focusing more on new premium payments rather than renewals. A policy is considered lapsed when the premium is not paid within 15-60 days of the due date. The lapse ratio is calculated by dividing the number of lapses by the average number of policies in force during a year.
“Lapse ratio beyond 10% is not healthy,” said S.B. Mathur, secretary general, Life Insurance Council, a national industry lobby. The lapse ratio for ICICI Prudential Life Insurance Co. Ltd, the life insurance arm of India’s largest private sector lender ICICI Bank Ltd, stood at 53% in 2009, up from 40% in the previous year. About 777,000 conventional policies worth Rs25,269 crore lapsed, the highest among private insurers by value.
In terms of lapse ratio, Aviva Life Insurance Co. India Ltd, leads the list with 32,000 policies or 59% lapsed, even though money involved was relatively small—Rs166 crore.
The Reliance-Anil Dhirubhai Ambani Group-controlled Reliance Life Insurance Co. Ltd saw its lapse ratio almost double—40% in 2009 against 21% a year ago.
The lapse ratio for India’s largest and the only state-owned life insurer Life Insurance Corp. of India (LIC) declined to 4% for 2009 from 6% in the previous year. In absolute terms, nearly 7.3 million traditional policies worth Rs52,926 crore lapsed. Almost half the conventional policies that lapsed in the industry in 2009 were sold by LIC.
According to ICICI Prudential, the Irda data pertains to only 10% of its portfolio. “About 43% of our non-linked business constitutes term assurance, another 35-40% are in health insurance and the rest account for traditional insurance policies. We monitor lapsation and take corrective action at a portfolio level,” said Anita Pai, executive vice-president, ICICI Prudential.
“This does not correlate directly to mis-selling. Lapse in the non-linked portfolios is because of our attempts to open up new market segments like health in a regular premium mode,” she said.
Aviva Life, too, said that the share of its non-linked business is small. “During the year, life insurance companies including Aviva India introduced very competitive pure term policies and this resulted in lapse and re-entry of pure term policies as customers bought new policies with competitive terms... There is a continuous challenge of renewal premium collection in rural areas,” said an Aviva spokesperson.
The firm said many of its customers chose to exercise the surrender option due to the economic slowdown in 2007-08. Aviva said it has taken many steps to improve the persistency of business and “to support renewal premium payment by the customer”.
According to Rajesh Sud, chief executive officer and managing director of Max New York Life Insurance Co. Ltd, which saw 198,000 policies worth Rs5,915 crore lapsing, the high lapse ratio need not necessarily mean mis-selling “though it indicates a lack of understanding on the part of policyholders”.
Referring to the global financial turmoil and impact on India in 2009, Sud said: “This led to lack of risk appetite and short-term view of most financial decisions, which resulted in higher lapse rate, especially during the latter part of financial year 2009.”
Malay Ghosh, president, Reliance Life Insurance, said: “In case of traditional policies, which contribute around 2% of our overall portfolio, our lapse policy numbers are comparable to some other players of similar size.” The firm, according to him, is taking aggressive steps to address all issues including customer education, awareness and redressal.
Though most of the private players refused to admit mis-selling of policies, the Irda data shows out of 1,794 complaints registered by the life insurance industry in 2009, 17.45% of the complaints relate to the wrong plan and term allotted, the highest among all categories of complaints. Mathur of Life Insurance Council said private sector players were not focusing on renewal premiums in the initial years and this led to high lapses. “They should focus on renewals, sell more regular premium policies and try reducing the surrender values,” he said.
Graphics by Yogesh Kumar/Mint