A large chunk of insurance policies from private insurers lapsed because investors didn’t pay their renewal premium, data from the IRDA’s Handbook of Statistics reveal.
The lapse ratio was as high as 51 per cent for Birla Sun Life Insurance, 49 per cent for Future Generali and at 42 per cent and 36 per cent, respectively, for ICICI Prudential and Bharti Axa Life in 2011-12.
Lapse ratio is the proportion of policies where renewal premium was not paid.
The Life Insurance Corporation has, however, maintained lapse ratios at 4-5 per cent over the last few years.
Clubbing private players and LIC, investors didn’t renew a total of 160 lakh traditional insurance plans of the value of Rs 1.9 lakh crore (total sum assured) in 2011-12, registering a two-fold jump from 2008-09. Traditional plans include term covers, endowment policies and health insurance plans. It excludes unit linked plans (ULIPs). Had ULIPs been included the lapse ratios will be even higher.
The persistency ratio – the number of policyholders who stay with their policy for five years or more – is also low. A majority of private insurers saw less than half their policyholders staying on after the fifth year.
Why did so many investors not renew their insurance plans? Some insurers say this is a result of investors switching plans due to changing priorities.
Saujanya Shrivastava, Chief Marketing Officer of Bharti AXA said, “Policy lapses are high mainly in the endowment segment where the policy tenure is 10 or 15 years and people lack long term commitment because of changing priorities.”
Another side to the story could be mis-selling, where agents mis-represent the product to the prospect. The Insurance Ombudsman received a total of 1.07 lakh complaints in 2011-12 on ‘unfair business practices’ in life policies. One-third of these policyholders complained that the product was different from what was projected.
Changing regulations that see insurers launching new products every year could also play a role.
“Insurers keep launching new products and the message that goes to consumers is that old products are not good enough. They then just try to cut losses and move away (from their older plans),” says Shashwat Sharma, Partner– KPMG (India).
Where does the money go?
The next big question is – what happens to the premium collected on lapsed policies?
When a traditional policy is discontinued after three years, it attains paid-up status and the surrender value as agreed is paid back to the policyholder.
However, when a buyer stops premium payments within three years, “the money is moved to reserves and carried forward for future appropriation or made available to shareholders depending on whether it is a participating or non-participating plan,” says Anish P. Amin, Partner-PwC.
If ULIPs are included, the lapse ratios would be even higher. In a ULIP, if premium payment is stopped within five years, the money is transferred to a separate fund that earns token returns. At the end of the fifth year, the money is paid to the policyholder.