Whenever you are buying a new life insurance policy, you have plenty of numbers to look at. There are a few numbers which tell the story of the life insurance provider. These are mostly ratios based on the insurer’s performance in the previous year.
Some of the important ratios include solvency ratio, claim settlement ratio, and persistency ratio. While you may already know about solvency ratio and claim settlement ratio, persistency ratio could sound like a new term, especially since it doesn’t quite reveal its meaning, unlike claim settlement and solvency ratio.
Key Takeaways
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The persistency ratio is the ratio of life insurance policies receiving timely premiums in the year and the number of net active policies. The ratio indicates how many policyholders are paying the due premiums regularly on the policies with the insurer.
The number generally shows how long the customers stay with the insurer. Thus, it won’t be wrong to consider an indicator of the insurer’s overall customer satisfaction. In simple terms, if you look at the reasons why anyone would stop paying life insurance premiums, the picture is quite clear.
The ratio is measured for the financial year or a combination of financial years starting one year to 5 years. The 1st year’s persistency ratio is estimated in the 1st month of the next year and so on. That’s why the one-year persistency ratio is indicated as the 13th-month ratio and the 3-year ratio would be called 37th month persistency ratio, and so on.
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Persistency is a very important metric for both insurance companies and policyholders. Wondering why? Here are some of the pointers for you to consider:
The persistency rates an insurance company has highlighted the trust or mistrust current and older policyholders have in it. The higher the number of customers who renew their insurance plans with a company, the higher their satisfaction with that company. Thus, their persistency rates will be higher as well.
A high persistency ratio shows potential customers just how much trust and credibility a company has with its existing customers. A low persistency ratio, on the other hand, tells customers that they are better off not approaching the company. This tells the company that they have to improve an aspect of their service to better fulfil their customers’ needs.
A company must thus maintain high persistency rates to generate more revenue and maintain customer loyalty.
A high persistency ratio first signals to customers that a particular company is worth buying a policy with. Insurance also works as an investment, so it makes sense to buy a policy with the most trusted insurance companies. Continuing to renew and invest in a policy you are happy with helps you use tax benefits for longer.
In 2019, India’s share in the global insurance market was 2.73%
Source: IRDAI
A declining persistency ratio can impact an insurer's profitability. Several factors contribute to a decline in the persistence ratio are as follows-
The way policyholders perceive their insurance policies plays a significant role in the persistency ratio. Some common reasons are as follows:
Economic conditions can force policyholders to reconsider their financial commitments, including life insurance. Some key economic reasons for a declining persistency ratio include:
Customer experience plays a vital role in maintaining persistence. If policyholders feel dissatisfied with their insurer, they may discontinue their policies. Common customer satisfaction issues include:
Here are the reasons that contribute to policyholders discontinuing their premium payments:
Most common of these reasons, 1 - 4, point to the insurer as the cause behind customer’s action. Thus, the persistency ratio becomes a measure of the insurer’s performance with the existing customer.
Obviously, you’d like to only go with the brand with the most satisfied customers. So, the ratio becomes an important factor in your buying decision. You can also call this ratio as a replication of customer reviews for brands.
The solvency margin of Canara HSBC Life Insurance stood at a healthy 365% against the regulatory requirement of 150%. The company has reported the following persistency ratios for FY 19-20:
From the industry standards, where most insurers face the 50% ratio for the first year only, these numbers are good.
There are two main ways to calculate persistency rates in life insurance. You can use either the annualised premium or the number of renewed policies to calculate the persistency ratio formula. The formula is as follows:
Persistency Ratio = (Number of policyholders paying premiums/ net active policyholders) x 100 |
For example, if a company’s persistency ratio for a particular year is 75%, that means out of 100% of written insurance policies, 75% are renewing their policies.
The company checks the persistency rates at particular times. They check around the 13th month of the policy term to determine the persistency ratio in the 1st year. For 2 years, it is the 25th month, and the 37th month for a 3-year policy, and so on.
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Online policyholders have different expectations and buying behaviours than traditional buyers. Their long-term commitment to premium payments directly impacts insurers' profitability.
Here's a table comparing online and traditional policies based on key factors that affect persistence.
Key Factors | Online Policies | Traditional Policies |
Ease of Comparison | Online buyers can compare multiple policies instantly and switch easily. | Buyers rely on agents, making comparisons less flexible. |
Self Service Model | Buyers use digital tools for policy management, ensuring hassle-free renewals. | Agents assist with renewals, but manual processes may cause delays. |
Convenient Payment Options | Online buyers benefit from seamless recurring payments, avoiding manual renewals. | Payments are often manual or require agent assistance. |
This table highlights how digital platforms enhance convenience, making persistence more manageable for online buyers.
The digital experience plays a crucial role in policy retention. Key factors influencing persistence in online policies include:
An insurance company must keep track of its persistence rates, and improve on it by better serving their customers. Knowing the persistency ratio of an insurer will give a customer a better understanding of how the insurance company serves and treats its customers. This information helps you make a well-informed decision and choose the right insurance policy for you and your family.
The persistency ratio helps one understand a particular insurance company's customer retention ratio and make an ideal decision.
A persistency rate measures the percentage of insurance policies or investments that remain active and are not canceled or surrendered by policyholders over a specified period. It indicates the level of customer retention and the stability of the insurance or investment portfolio.
According to the IRDAI, an insurance company must have a minimum of 50% persistency ratio.
The persistency ratio is calculated at different intervals in someone’s life insurance term. For the first year, the calculation is done in the 13th month. For the second year, the 25th month. For the third year, the 37th month, and so on.
For example, an insurance company sold 1000 insurance policies in a year, and 750 of those policies were renewed. The persistence ratio of this company would be 750:1000, or 75%.
The 61st-month persistency ratio is the number of policyholders who would renew their policies after the 5th year. In India, the persistency ratio for the 61st month is 60%.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
