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The soaring policy surrenders are a blow to insurers who are seeing low premium collections.
The soaring policy surrenders are a blow to insurers who are seeing low premium collections.

Insurers see spurt in surrender of policies

  • People have started borrowing against life policies as collateral more than before so that they are able to continue to have cash all the time, life insurers said
  • The increasing policy surrenders come as another blow to insurers who are already battling low new premium collections

Even as the coronavirus pandemic continues to rage, policyholders are giving up their life cover at a rapid pace amid pay cuts, job losses and general economic uncertainty, top executives at four life insurance firms said.

In the June quarter, the 13-persistency ratio, which measures how long a policyholder retains insurance, declined by an average of close to 10 percentage points from a year ago, the executives said on condition of anonymity. The decline means many customers did not renew policies after paying the first year’s premium.

In the same period, the average ticket size (premium) of conventional life insurance products such as endowment, pension and money-back policies fell by 25-30%, three of the four officials said, adding unit-linked insurance products (Ulips), the mainstay of many insurers, are witnessing significant premature withdrawals.

“People who bought 20-30 year tenure life insurance policies are surrendering policies and withdrawing money, which is tax-free. This, they are doing to keep as much cash as possible, and later start new policies or investment plans once the pandemic is over and the situation improves," the first of the four people said.

The increasing policy surrenders come as another blow to insurers who are already battling low new premium collections.

“In Ulips, the trend is more worrisome. Ulips contribute 45-50% of premium income for private insurers. Policyholders are in a rush to redeem investments and stop policies every time the equity market goes up," said the second person.

“We, as an industry, are expecting a rise in surrenders as customers now prefer to have immediate cash in hand. Many surrenders may be stuck because insurance company branches are closed, but surrenders may rise in coming days," said Tarun Chugh, managing director and CEO of Bajaj Allianz Life Insurance Co. Ltd.

“Typically, in Ulips, surrenders are more rampant because the surrender value goes up when the market and the NAV go up. In Ulips, one can withdraw the policy any time after five years, even if the Ulip is booked for 10 years," said Chugh. He said in 2019-20, too, saw a decline in persistency, adding that for Bajaj Allianz Life, the ratio for the June quarter was only slightly down to 76.6% from 77% a year ago.

For the life insurance industry as a whole, the average annual premium fell to 47,236 in the June quarter from 54,651 a year ago, as risk-averse customers sought to keep disposable cash and preferred pure protection products rather than investment-oriented policies.

For Bajaj Allianz, the average ticket size in the June quarter fell by 30% to 39,061 from 55,657 a year ago.

“The industry’s growth is now being driven by protection and guarantee products, which relatively have a lower ticket size as compared to Ulips. Equity Ulips remain a drag on growth on account of cyclical weakness in Ulip sales due to weak capital markets. Ulips used to be a higher ticket size segment," said a spokesperson at Bajaj Allianz Life.

People have started borrowing against life policies as collateral more than before so that they are able to continue to have cash all the time, life insurers said.

In the June quarter, Bajaj Allianz gave out 2,077 loans worth 25.8 crore against life policies.

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