BackIrda’s U-turn on persistency of life insurance policies
From 1 July insurers are free to determine their own company specific persistency criterion for renewal of agency license
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New Delhi: The regulatory push to stop agents from mis-selling has proved to be short-lived.
In 2011, the Insurance Regulatory and Development Authority (Irda), under the then chairman J. Hari Narayan, did the unthinkable. It put in place a minimum standard of performance for agents to renew their agency license . According to the 2011 rules, life insurance agents needed to maintain a persistency rate of at least 50% for life insurance policies sold by them in order to be eligible for a renewal of their agency licence—the agency licence needs to get renewed every three years. Persistency of a life insurance policy indicates whether the customer is renewing his or her policy each year or quitting it midway. A high persistency rate reflects good sales practices because life insurance is a long term product. But before these guidelines could have any meaningful impact, Irda, under chairman T.S. Vijayan, did a volte-face in its notification on 12 February.
According to the latest notification, renewal of agency licence is no longer subject to meeting the uniform minimum persistency criterion. Instead, from 1 July, insurers are free to determine their own company specific persistency criterion for renewal of agency license.
These guidelines come at a time when the industry has been gearing up to take the next leap in persistency requirement for agents. According to the guidelines issued in February 2011, agents had to maintain a minimum persistency rate of 50% for three years and from FY15 the persistency rate had to increase to 75%. This meant each year at least 75% of the policies sold by agents should come back for renewal.
These guidelines come at a time when the industry has been gearing up to take the next leap in persistency requirement for agents. According to the guidelines issued in February 2011, agents had to maintain a minimum average persistency rate of 50% for three years i.e. FY12, FY13 and FY14 and from FY15 the persistency rate had to increase to 75%. This meant each year at least 75% of the policies sold by agents should come back for renewal.
Persistency is a very important metric in insurance as life insurance is a long-term contract. In fact, both the insurer and the policyholder benefit if the policy is held for the entire tenor of the contract. Agents benefit if the policy is churned every few years as they collect higher first-year commissions than the commissions due from year two onwards.
Concerned about poor persistency of life insurance policies, Irda in 2011 had put in place the minimum standard of performance for insurance agents as the authority was of the view that agents could play a vital role in ensuring high persistency by not selling unsuitable products, bringing in transparency in providing correct and complete details of suitable products to the prospective policyholders and by considering the needs of prospective policyholders.
By scrapping the need for agents to maintain persistency of policies sold by them and by allowing insurers to fix their own persistency criteria, there is a good chance that agents may once again be encouraged to mis-sell.
“Mis-selling is a big concern to address. Poor persistency is often the outcome of mis-selling. That’s why it is useful to set a high persistency benchmark uniformly across the industry. There must be a rationale why the regulator has removed the uniform persistency requirement," says Kapil Mehta, managing director, SecureNow Insurance Broker Pvt. Ltd.
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