25% First Year Policy Lapsed

Close to a fourth of the savings that goes into regular premium investment policies goes to waste. Despite an improvement in their persistency ratios, most life insurance companies have at least 25 percent of policyholders dropping out after the first year. 

In terms of number of policies, the dropouts are much higher with nearly a third of buyers not paying their annual dues. According to data released by the Insurance Regulatory and Development Authority of India in its insurance statistics handbook, the 13th month persistency for the Life Insurance Corporation (LIC) in terms of policies sold was 64 per cent in March 2017. This means that of the policies sold in the previous year, 36 per cent of the purchasers did not renew them in the subsequent year. 

The figure improved to 66 per cent in 2018, but continues to be high — representing a one-third dropout rate. Sources in LIC say that the dropout ratio is higher among low-value policies and it improves when the renewals ratio is checked as a percentage of premium rather than the number of policies sold. 

However, even when it comes to premium, there are only 76 per cent renewals in the second year. The lapsed policies are almost a total loss to the policyholder. In the case of a lapse within a year, the policyholder loses most of his money since the insurance company books all its costs, including commission, upfront in the first year. In 2016-17, LIC sold Rs 22,178 crore worth of regular premium policies. 

This was 44 per cent of the regular premium collected by the industry.Extrapolating the 24 per cent lapse ratio to the fiscal year numbers would indicate that premium worth over Rs 5,000 crore has lapsed for LIC alone. Of the 1.89 crore policies it sold in FY17, a third would have lapsed. 

Those in the insurance industry attribute the high rate of lapsation to the fact that agents push low-value policies or split policies in order to achieve their target in terms of numbers. But lapsation of high-value policies are a pointer to continued misselling. 

In the West, life insurance companies tackle mis-selling by incorporating a ‘clawback clause’ in their contracts with agents — companies pay high first-year commissions, but recover them from agents if the policy lapses. Insiders say that lapsations are also the reason why assets under management (AUM) of life companies are growing at a much sedate pace compared to mutual funds (MFs). 

The AUM of the Indian MF Industry has grown from Rs 5.41 lakh crore as on July 31, 2008 to more than Rs 23 lakh crore as on July 31, 2018 — a more than fourfold increase in a span of 10 years. For the life industry, AUM has been growing at 11-14 per cent and stands at around Rs 30 lakh crore