Why is comparing persistency difficult?

Persistency ratio is one of the tools to assess the basic hygiene standards of a life insurance company. This ratio shows the leakages in renewal or year-on-year premiums of life policies. However, lack of standardization in the Indian insurance industry has made this ratio difficult to use—different insurers use different interpretations of persistency.

Broadly, there are two ways to calculate persistency. The first is on an absolute basis or non-reducing basis. Here, if the insurer got Rs100, Rs70 and Rs60 in the first, second and third years, respectively, then the persistency ratio in the first and second year will be 70% and 60%, respectively. In other words, persistency ratio in absolute figures takes Rs100 in the denominator.

Two, the reducing balance method where the denominator changes to the amount of premiums collected in the preceding year. So the second year persistency on a reducing balance basis in the above mentioned example would be around 86%, that is Rs60 divided by Rs70.

Also See | 1, 2 and 3-year persistency ratios (Graphic)

What’s the mandate?

Though the Insurance Regulatory and Development Authority mandates persistency ratio on an absolute basis, some insurers report it on a reducing balance basis. The reducing balance method shows companies with poor persistency numbers in better light. Of the 10 companies that have reported their persistency ratios for FY12, firms such as ICICI Prudential Life Insurance Co. Ltd and IDBI Federal Life Insurance Co. Ltd report persistency on a reducing balance basis only. Says G.V. Nageswara Rao, managing director and CEO, IDBI Federal Life: “Most companies report persistency ratio on a reducing balance basis. We have reported our persistency on a reducing balance basis upfront. Many companies don’t disclose the manner in which they have calculated the ratio.”

Graphic by Sandeep Bhatnagar/Mint

deepti.bh@livemint.com