Is Your Life Insurance Leaking

Five years after life insurance policies are sold, two-thirds of them are lapsed by the buyers. Everybody loses because of this—the industry as well as the customers

The Insurance Regulatory and Development Authority of India (Irdai), in its Handbook on Indian Insurance Statistics 2015-16, has provided persistency figures of the life insurance industry—and they are not looking good. For FY2016, the life insurance industry, on average, had a persistency of 61% in the 13th month, which means: 1 year after the sale, only 61 out of every 100 policies were renewed.

Persistency measures how long customers persist with their policies. By the 5th year of policy sale, 16 out of the 24 life insurance companies couldn’t retain even a third of the policies. 

Let that sink in: 5 years after being bought, two-thirds of the life insurance policies are no more. The numbers maybe better for some insurers, but the big picture is worrisome. Globally, persistency of these policies is close to 90% in the 13th month and above 65% after 5 years.  

Why is persistency important? 

For the industry this is worrisome as persistency is a key drivers for profitability. “A 13th month persistency of less than 80% is bad. Poor persistency impacts profitability over the long run as fixed costs get spread over a smaller base. This means that insurers are unable to achieve cost efficiencies and that keeps their expense ratio high,” said Sanket Kawatkar, principal and consulting actuary-life insurance India, Milliman India Pvt. Ltd. “Most insurers have an expense ratio in double digits, and they need to bring it down to a single digit. Improving persistency is one of the ways to achieve it,” he added. 

For the customer too, this merits serious thought. Life insurance policies are long-term contracts and you benefit only if you stay the course of the policy. In traditional products, which most insurers sell currently, the penalty for quitting midway is harsh. For instance, if you quit in the first 2 years, the rules allow insurers to charge you your entire money as surrender penalty. In the case of unit-linked insurance plans (Ulips), while surrender costs are minimal, the front-loaded costs still impact your money. 

Click here for enlarge

Report card 

Let’s look at a few things that Irdai’s handbook reveals. In terms of 13th month persistency, 17 insurers improved their record in FY2016 compared to 16 in FY2015. But, the average has improved only marginally. In FY2015, the average 13th month persistency was 59% and it increased to 61% in FY2016. This is just a simple calculation of the average and not the weighted average, which gives a more accurate picture. The weighted average will gravitate towards persistency performance of insurers that have large market shares.

For instance: Life Insurance Corporation of India (LIC), which has the largest market share, reported a 13th month persistency ratio of 63%, while ICICI Prudential Life Insurance Co. Ltd, largest private life insurer in the retail space, reported a persistency ration of 79%. At the bottom are four insurers who retained half or less than half of their policies sold in the 13th month. In FY2015, this number was six. 

“If you look at the top four insurers, which cover two-thirds of the private sector, there has been a gradual improvement in 13th month persistency every year by 2-3 percentage points. This is largely due to many things like the shift in customer segment in last 4-5 years and increasing the ticket size from about Rs25,000 to Rs50,000, hence the policy purchases are more considered and not done in a rushed or obligatory manner,” said V. Viswanand, senior director and chief operating officer, Max Life Insurance Co. Ltd. “However, the bottom 15 insurers are perhaps in the catch-up mode for top-line growth in their phase of evolution,” he added. 

However, according to Viswanand, there has been improvement in the 61st month bucket. “For many insurers the 61st month persistency has improved and that shows the change in Ulip regulations has actually led to right sale of the product, and even after the mandatory lock-in of 5 years, the policies are not being lapsed. In fact, the retention in Ulips has now come on par with traditional plans.” he added. 

Things have improved according to the handbook too. In FY2016, 16 insurers couldn’t retain even a third of the policies they sold 5 years back. In FY2015, this number was 19. But it’s not enough, says P. Nandagopal, founder and chief executive officer, OpenWorld Insurance Broking Ltd. “A persistency of anything less than 40%, at the very least, is very worrisome especially if it’s reported by insurers with a huge agency channel with very high front-end costs. This means that the distributor is getting paid for top-line but poor persistency is destroying value for both customers and the company,” he said. 

Why is that the case? 

Distribution that chases top-line is one of the reasons why persistency is low. “Take the example of sudden spurt in premium collection after demonetization. Did this mean that people suddenly needed insurance? It meant that it was easy to sell policies at that time. But did people really need it? And if not, then what will happen to these policies? They are bound to lapse. Need-based selling is what is needed in the industry,” said Kawatkar. And that should be the focus area for insurers. 

“The fundamental value proposition for any business is to retain its customers. Especially when you spend so much on acquiring them in the first place. When the cost of acquisition is higher than customer life-time value to an enterprise, that business is not viable,” added Nandagopal. 

The other reason why the industry continues with such poor performance is due to the fact that it sells largely savings products.

“India ranks very low in persistency compared to other Asian countries like China, Thailand and Indonesia.  Persistency has been a challenge in India because bulk of the products are saving products, and the expectation is that the customer will remain invested for 10 years. But the customer changes her mind when other products offer better returns. This problem has been of a high order in India,” said Ashish Vohra, chief executive officer, Reliance Nippon Life Insurance Co. Ltd. 

According to Nandagopal, this is largely due to the poor returns that customers get. “If you look at traditional insurance plans, the returns are abysmal year after year. Whereas customers are getting smarter, they choose to cut their losses by quitting midway," added Nandagopal.

But this begs the question, why did customers buy the policies in the first place? Lack of disclosures, coupled with hard sell, is why insurance products are bought. In fact, even after the industry moved to selling traditional plans and despite the high surrender cost of traditional plans, customers are lapsing their policies. This reveals the nature of distribution that focuses on top-line. 

For you, the customer, the recourse then is to make sure you understand the policy well and see where it fits in your goals. At the minimum, you need to know what the return on your investment is in percentage terms; and if the agent can't tell, don't buy.