Life insurance persistency good in first year, not in the long term

Life insurance companies are witnessing healthy growth in persistency in short period of one-year however, that is not the case in long term. As per data on persistency for the financial year 2011-12, insurers registered an average of 64.4 per cent policies renewed in second year, it was 64.3 per cent in last year. However, the average persistency ratio for fifth year was 46.5 per cent, which was 48 per cent in previous year.

Persistency ratio indicates the percentage of policies on which the premiums are paid regularly by the policyholders. The 13-month persistency ratio is based on the fact that most renewals become due after one year and an additional thirty days of grace period is given by insurers to pay premium, so effectively the ratio indicates the policies on which premium is paid for the second year.

“Policyholders generally withhold premium in the second year if their financial condition is not good or they are not happy with the product, but in case he stops premium payment in sixth year then it is something more severe, as they have continued the policy for first five years,” said said P Nandagopal, managing director and chief executive officer of IndiaFirst Life Insurance.

Six large insurers including public sector insurer Life Insurance Corporation of India (LIC), ratio for five insurers improved in 13th month, however only two have shown improvement in 61-month persistency ratio.

The six insurers chosen for analysis had highest number of individual policies in force. Apart from LIC, HDFC Standard Life Insurance, ICICI Prudential Life Insurance, SBI Life Insurance, Reliance Life Insurance and Bajaj Allianz Life Insurance were also analysed.

As per data available in annual report for the financial year 2011-12 released by Insurance Regulatory and Development Authority (Irda), 13-month persistency ratio of LIC improved to 75 per cent in FY12 from 70 in FY11. For HDFC Standard it improved to 75.4 per cent in FY12 from 71.97 per cent in preceding year. ICICI Prudential witnessed it rise to 77 per cent in FY12 from 75.8 per cent last year. SBI Life saw marginal improvement, as the ratio rose to 51.4 per cent in FY12 from 51.2 per cent in previous year. Reliance life witnessed ratio improves to 73.7 per cent from 73.5 per cent in FY11. Bajaj Allianz Life saw decline, as ratio dipped to 54.6 per cent in FY12 as against 56.31 per cent in FY11.

However, if the analysis is extended for a longer period of five-years then we see that only two insurers have seen rise in persistency ratio. SBI Life saw persistency ratio go up to 80.3 per cent in FY12 from 26.3 per cent in FY11. ICICI Prudential saw marginal rise in FY12, as ratio was 65.3 per cent as against 65.2 per cent last year.

Bajaj Allianz witnessed drop in FY12, as the ratio was 43.5 per cent as against 72.6 per cent in FY11. Ratio for LIC was 31 per cent in FY12 as against 39 per cent in previous year. Reliance Life had 61-month persistency ratio of 41.7 per cent in FY12 while it was 49.2 per cent in FY11. HDFC Standard Life had persistency ratio of 78.4 per cent in FY12, while it was 84.6 per cent in FY11.

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