Persistency of life insurance policies and servicing of orphan insurance policies

Life insurance policies are generally of long-term in nature. As such, in the interests of all parties, i.e., the policyholders, the intermediaries and other stakeholders, the insurer has to put in place measures to ensure that the policies remain in force all through their full term. The following are some of the issues that normally determine the persistency of life insurance policies:

Suitability of product: As the life insurance policies are generally long-term, in the event a product is found not suitable at a subsequent point in time or the product portfolio that is subsequently available in the market offers a different stream of benefits, there is a possibility of discontinuing the existing policies. While some factors are certainly extraneous, offering a suitable life insurance product by carrying out an appropriate need analysis of the prospects significantly improves the persistency.

Extraneous factors of policyholders: Owing to the changes in the social and economic profile of policyholders, there may be an impact on the ability of policyholders to continue the payment of premiums. This in turn results in affecting the persistency of the life policies. Despite these factors being totally extraneous, there is a role for insurance intermediaries in mitigating the levels of persistency even in these categories of policyholders.

Post Sale Policy Service: Absence of effective post sale policyholders’ service may also trigger discontinuance of premiums. While largely insurers have a role in putting in place post sale policyholders’ service within the reasonable reach of policyholders; in the Indian scenario, historically, Insurance Agents play a pivotal role in rendering post sale policyholders’ service thereby ensuring persistency of life policies. On analysis of the data on persistency trends in the Indian life insurance Industry for the past three years (2009-10 to 2011-12, it is observed that:

  • The 13th month persistency has by and large improved over the last three years across companies.
  • The 25th month persistency too has improved over the last three years for two thirds of companies.
  • The 37th month persistency decreased for majority of insurers in 2010-11, but staged a recovery in 2011-12. Nearly for half of the companies, this ratio has decreased in 2011-12.
  • With some exceptions, the 49th and 61st month persistency went down both in 2010-11 and 2011-12.
  • The persistency ratios generally went down as the duration of the policy advanced.

In this context, IRDA was of the considered view that insurance intermediaries have an effective role in improving the persistency rates both at the stage of pre-sale process, by way of carrying out a proper need analysis of prospects and during post-sale stage, in rendering effective policy service. Accordingly, the IRDA issued Circular (No. IRDA/Life/GDL/GLD/217/09/2011 dated 20th September, 2011) on the minimum requirements on persistency, which has been kept as 50 per cent (to be reckoned in terms of number of policies). These persistency requirements have been made applicable to both Individual insurance agents as well as corporate agents.

As indicated above, one of the factors that influences the persistency of life policies is the post sale service that is rendered on demand and in time to the policyholders. As life insurance policies are long-term in nature the changing life stages may at times warrant effecting a concomitant and simultaneous modification that are in the nature of policy alterations / services which also propels in reinforcing the higher persistency levels of life insurance policies. In India, individual agents significantly contribute to the life insurance industry both by garnering the business as also in conserving the same.

However, it is noticed that a large number of agents discontinue their respective services with life insurers leaving a number of policies unattended without any personalized services. These life insurance policies, at times, deserve a personalized service in order to ensure continuity of premium payments.

These policies, which may be referred to as ‘orphan’ also burdens the insurance company owing to a drop in persistency, inability to offer a personalized service that may affect the image amongst the insuring public and outweighs the costs in establishing other alternate service arrangements.

Under these circumstances, IRDA considered that it is important and in line with the interests of such orphan policies, that a system deserves to be instituted, where the orphan lapsed policies are assigned to the existing agents for rendering post sale policy service in consideration for appropriate remuneration.

It is envisaged that this system will offer a facilitative approach to the life insurers for allotting the lapsed orphan policies without diverting the business resources for establishing other alternate arrangements exclusively for the purpose of rendering post sale service to a relatively limited segment of policyholders. Towards this end, the IRDA has issued guidelines for servicing of Orphan Policies vide its Circular No. IRDA/Life/GDL/Agn/134/06/2012 dated 13th June, 2012.

Courtesy IRDA Annual Report 2011-12