Persistency ratios show life insurers struggle to keep policyholders on board
Life insurance is a long-term product and so is the business. Costs are mostly upfront and insurance companies begin earning margins only later. A slew of life insurance companies will be tapping public money through share offers and get listed. In the wake of this, future prospects for these companies are a key metric that investors will monitor. One indicator of this is the persistency ratio.
The persistency ratio shows what proportion of policyholders stick with their product and keep funding it, and for how long. Insurers have to disclose persistency ratios of the 13th, 25th, 37th, 49th and the 61st month. In other words, insurers detail the proportion of policyholders who stick with their policies every year beyond the first one.
Life insurers fare poorly in persistency ratios beyond the third year and this does not augur well for their business outlook. For instance, only 50% of SBI Life’s policyholders continue paying premiums beyond the third year. This ratio is 48% for the country’s largest insurer, Life Insurance Corporation of India (LIC). Data from the Insurance Regulatory and Development Authority of India (IRDA) shows that almost all insurance companies see a sharp drop in their persistency ratios beyond the third year.
For fiscal year 2016, persistency ratio for the industry dropped to an average 38% in the 49th month from around 44% in the 37th month. This drops further to an average of 29% in the 61st month. The accompanying chart shows how the top four insurance companies, holding more than 80% of the business pie, fare in persistency ratios.
An important point to be kept in mind is that a falling persistency ratio hurts insurers that have a large portion of their products in market-linked rather than traditional products. That is because a rule change in 2010 mandated life insurers to not appropriate the entire corpus of a market-linked insurance policy which lapsed in the first five years. Traditional policies are still allowed to appropriate the corpus. Hence, persistency ratios may not hit LIC as most of its products are traditional ones. Private insurers such as ICICI Prudential Life Insurance would do well to improve on their persistency ratios.
To be fair, private insurers have seen a rise in their persistency ratios in the last three years, as the chart shows. But they still have a long way to go. It is not surprising that on the basis of renewal premium, the business growth of life insurers is dismal in the country. While new business premium growth was more than 25% in FY17, renewal premium business growth was in the low single digits.