Life Insurance: Bad Persistency – Mother of all problems of industry

Based on public disclosures of life insurers, the persistency of life insurance policies in Indian market is very low. The 13th month persistency is in the range of 60 to 70% for many companies whereas this is more than 90% for many markets outside India. The 61st month persistency is alarming. It is in the range of 20 to 30%.

If a policyholder stops paying premium during the term of the policy, he/she may be losing money. The extent of loss depends on the timing of discontinuance of premium. If it is during the initial years of policy, the loss may be bigger.

If policyholder is losing money, is it beneficial to insurer? Not really. Insurer’s loss is even bigger. From each premium collected, a small portion goes towards expenses of the company, cost of mortality and of course, profit margin. Insurer is losing all of them.

In fact, bad persistency is one of the main reasons for expense overruns. If the renewal premiums are not received, the contribution towards expenses (allowances for expenses) also is not received and hence the expenses are more than the expense allowances. This results into overruns. Same is the case with mortality experience. Those who are in good health only, tend to stop paying premiums (as they don’t see the need for insurance) and hence the remaining portfolio has less number of healthy lives. Since unhealthy lives are continuing in the portfolio, there is no significant reduction in the death claim experience. This results into worsening of mortality experience. All this leads to reduced profit margins.

Further, higher expenses and higher mortality will have to be fed into pricing of products. So, the products will no longer be competitive. This will reduce sales volumes. Reduced sales volumes will further worsen the experience. It’s a vicious circle. It’s very difficult to capture all this and quantify the loss to insurer due to bad persistency.

So, it is not just in the interest of the policyholder, but also in the interest of life insurer that the policy continues to be in-force. The key for achieving this is to ensure that the right insurance product is sold to right person. This reduces the need for policyholder to lapse the policy.