New Delhi: Less than half the life insurance business initiated three years ago was generating premiums for the industry at the end of the last fiscal year, available data show, as insurers paid the price for mis-selling hybrid products that offered buyers an avenue for investment plus life protection.
Ten of the 24 life insurance companies have declared their numbers, and of these, nine had a so-called three-year persistency rate of 43% as of 31 March 2012, comparing poorly with the global average of about 78%. Indiafirst Life Insurance Co. Ltd was yet to complete three years in 2011-12.
A three-year persistency ratio measures the percentage of policies that are still yielding premiums three years after their sale. A persistency average of 43% means fewer than half the polices sold then are still being serviced by their buyers. With a persistency ratio of just 21% and 24%, respectively, SBI Life Insurance Co. Ltd and Kotak Mahindra Old Mutual Life Insurance Ltd fared the worst on this measure.
More than 70% of insurance policies sold three years back were unit-linked insurance plans (Ulips), in which a part of the investment goes towards providing life cover and the rest is invested in stocks and bonds. The value of the policy keeps altering with the value of the underlying investments.
Touted as three-year products, Ulips were mis-sold widely before the regulator clamped down on the industry in September 2010. The market is now experiencing the fallout of Ulip mis-selling.
Also See | Three years Persistency Ration (PDF)
“The low persistency ratio in the recent past is largely because of the nature of products sold,” said J. Hari Narayan, chairman of the Insurance Regulatory and Development Authority, the industry watchdog. “Most of the products sold were Ulip products; the remarkable exuberance of the stock markets in the years preceding 2011 had caused prospects to believe that Ulip products were a safe way of riding the stock market boom. This irrational belief was spurred by unrealistic expectations fostered on prospective clients by some of the intermediaries involved in the sale of such products.”
In India, the problem has been the product design and incentive structures in which front-loaded commissions of up to 40% spurred agents into hard-selling 15-year products as three-year market-linked policies. This resulted in poor persistency ratios, particularly in the third year.
“In developed economies persistency levels are often higher than 90%. That’s because policies are sold for the long term,” said Kapil Mehta, managing director of SecureNow Insurance Broker Pvt. Ltd. “However, the Indian market until very recently focused primarily on top-line sales. Selling the policy was much more important than ensuring customers stay for the long run till the policy matured.”
Ulips being sold as three-year investments led to a massive surrender after the completion of the third year, said Andrew Cartwright, appointed actuary at Kotak Life.
“Policyholders usually don’t surrender before the start of the fourth year, so the fourth-year premium is already due when the surrender is processed. Hence, such policies get factored in (in) the 37th month persistency ratio,” he explained.
However, life insurance companies attribute low persistency in the third year to the flexibility offered by the policy.
“After three years, we allow the policyholders to stop paying premiums. The policy continues to remain in force as long as the fund value is sufficient to recoup mortality costs. So it is also the flexibility that has led to low levels of persistency,” explained Satyan Jambunathan, executive vice-president, finance, at ICICI Prudential Life Insurance Co. Ltd.
The Ulip reforms carried out in September 2010 reduced costs for investors and increased the lock-in to five years, making the new breed of Ulips cheaper and causing customers to move to them, according to insurers who blame the changes for the persistency ratio declining.
This may not entirely reflect the current situation because the life insurance industry moved from selling Ulips to the still cost-heavy traditional products such as endowment and money-back policies. Post-2010, Ulips make up around 50% of sales.
Insurers also hold an exodus of agents as one of the reasons why policies have lapsed.
“A number of part-time agents have left the market due to reduced commissions, leaving behind many orphan policies,” says Rajesh Relan, managing director and country manager, MetLife India Insurance Co. Ltd. “Customers who do not get their policies serviced by agents tend to surrender or lapse their policies.”
The insurance regulator sees the problem differently.
“The view that regulatory reform has led to increased lapsation is perverse,” said Narayan. “The design of Ulips products particularly raises many issues and hence the authority in September 2010 brought out guidelines on Ulip product design and on surrenders with a view to improving the then prevailing products for the benefit of the policyholder. The rates of lapsation have come down since the regulatory reform and hence regulatory changes have not ushered in any decrease in persistency, but on the contrary have contributed significantly to its enhancement.”
For policyholders, the Ulip experience has been an unhappy one; they lost while the companies and agents made money during sales and even during lapsation. The design of Ulips until 2010 was such that it enabled insurers to recoup their expenses from policyholders in the form of steep surrender charges, leaving very little in the policy for the investor to recover.
“In case the policy lapses in the first three years, funds continue to remain invested. Fund management charges and policy administration charges continue to be deducted,” said Anand Pejawar, executive director of marketing at SBI Life. “The policyholder has an option to revive his policy within a stipulated time period. This is usually 24 months or 36 months. However, during revival, if the person does not pay his premiums, his policy gets terminated. In this case, the policyholder gets the surrender value after the deduction of very high surrender charge, at the end of the third policy year or the revival period, whichever is later.”
The surrender charges in pre-2010 Ulips, due to lack of any regulatory cap, could be as high as 100% of the residual fund value in the initial years.
The September 2010 regulatory changes limited the surrender charge or discontinuance charge to Rs 6,000 in the first year and nil after the fourth year; it also established a discontinued fund. If a customer now surrenders his policy before the lock-in period of five years, the money goes to the discontinued fund that earns a minimum rate of 3.5%, and after the lock-in period is over, the customers get their money back.
For all policyholders who bought Ulips before September 2010, the regulatory change came too late.