Photo: iStock
Photo: iStock

It’s still early death for most life policies

On an average, one in three life insurance policies sold don't make it to 5 years. Poor persistency means that customers lose money in the form of high exit penalties

The Indian life insurance industry continues to manufacture and sell products that die early. According to the Handbook of Statistics published by the insurance regulator, in FY17, the life insurance industry was able to retain an average of 65% of its policies after the first policy year and 34% after the fifth policy year. This means that one in three policies sold don’t survive 5 years. These numbers compare poorly with the global average, where life policies retain close to 90% of their customers after a year of sale and about 65% after 5 years.

In insurance parlance, policy retention is known as ‘persistency’ and ‘persistency ratio’ measures how long customers stay with their policies, by looking at the number of policy renewals year after year.

These numbers don’t bode well as life insurance is in the business of selling long-term products, of 10 years or more, and so it benefits if customers renew their policies year after year. Poor persistency doesn’t just hurt the insurer; you as a customer stand to lose much more largely because of the way life insurance policies are designed. Tracking persistency is, therefore, important, but the way persistency ratios are disclosed at present is not precise enough to give a true picture.

Indian life insurance plans still collapse early

Persistency numbers are still improving but are still far below global averages of 90% after one year and 65% after 5 years

Although still a long way to go, persistency numbers are slowly improving. In FY16, the average persistency ratio in the 13th month was 61%; in FY17, this number has improved to 65%. For the 61st month (the regulator doesn’t publish persistency beyond 5 years), persistency in FY16 was just 29% which improved to 34%.

“Increase in ticket size by selling policies to more affluent customer segments is perhaps the main reason behind improvement in the 13th month persistency. In the case of 61st month persistency, new Ulips (unit-linked insurance plans), where most customers continue to pay premiums even after 5-year lock-in period, is the main reason," said V. Viswanand, senior director and chief operating officer, Max Life Insurance Co. Ltd.

But the industry has a long journey ahead as actuarial experts say persistency of less than 80% can impact profitability over the long run since fixed costs get spread over a smaller base, keeping the expense ratio high. According to Kapil Mehta, co-founder, SecureNow.in, changing products and distribution can bring about improvement faster. “Persistency will improve if traditional plans undergo reform similar to unit-linked insurance, or if a higher proportion of products is sold through direct channels like the online medium. Systemic changes like training agents to sell in a need-based manner takes place relatively slowly," he said.

Currently, only five insurers from a total of 24 have upwards of 70% in the 13th month persistency ratio. Eighteen have improved their numbers from FY16 while six insurers have seen a drop in this bucket. The sharpest drop was witnessed by HDFC Standard Life Insurance Co. Ltd, which got listed last year. Its 13th month persistency fell from 71% in FY16 to 67% in FY17. As per its red herring prospectus, the drop is largely due to the poor persistency of its health insurance portfolio. In the 61st month ratio, HDFC Life was able to retain at least half the policies, which is more than what we can say about most insurers.

A poor persistency means that you are losing money by way of exit penalties. Most of what the insurance industry sells now is traditional plans, which have high exit penalties—100% of the premium in the first couple of years. So, when you decide to opt out of a policy, you actually end up forgoing your premiums.

To give you an idea of the magnitude of loss to customers, here are some rough calculations. In FY17, the industry sold 26.4 million policies. Given an average persistency rate of 65% after a year of sale, only 17.2 million policies were renewed. This means 9.26 million policies dropped out, and since the industry is dominated by traditional policies, it means that a large part of these policies didn’t give any money back to the customers.

“Persistency has not shown a marked improvement and if the insurers are not able to retain even 50% of their customers after 5 years, then the products being sold are really not long-term products," said K.S. Gopalakrishnan, chief executive officer, RGA Life Reinsurance Company of Canada (India Branch).

This brings us to an important point: how insurers currently report persistency figures. According to insurers we spoke to, some insurers include group policies (that are largely single-premium policies) and single-premium retail policies in their persistency calculation. Including this inflates the persistency reported as these are one-time payment policies and don’t lapse. Reporting persistency on the basis of retail regular premium policies will reflect true customer retention, and that needs to be standardised.

What’s also required at this point is further slicing of this number. It’s important to break persistency numbers by policy type and channel of distribution. “Term plans have a retention rate of more than 90%, and even if you lapse, you don’t lose anything in them because you are only paying the cost of insurance. Even in Ulips, the exit load is minimal, but it’s very high in non-linked plans. So there is a lot of merit in slicing the persistency numbers across product categories because insurers still manage to make profits through policy lapses in non-linked plans but customers lose the entire capital," added Gopalakrishnan.

Mehta said slicing the number product-wise will also bring about important product changes. “Persistency in Ulips has improved a lot owing to a better product construct. Charges are capped and exit penalties are minimal. There is no motivation to surrender the policy, but the same is not true for traditional plans where policyholders sometimes prefer to lapse than continue with a plan they don’t understand," he added.

Persistency ratios need to get cleaner and sharper as they are a commentary on the selling practices of an insurance company. For you, this is what poor persistency indicates. Majority of the plans are investment plans and a poor persistency indicates that people end up buying products they don’t need or understand. Stick to a term plan for now.

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