Life insurance | Why you should worry about policies that die The insurance business runs on hitting customers with a high-cost product and allowing the policy to lapse in the first three years. What would you say if a company had more than two-thirds of its customers returning the product? That there is something wrong with the product or the way it was sold? In insurance, customers return this product by either letting their policy lapse or by voluntarily surrendering their policy. In case of the non-linked business (term, group, health and endowment plans) for Birla Sun Life Insurance Co. Ltd, the lapsation ratio was as high as 72% for FY11. Lapsation ratio here means the number of policies lapsed divided by the average number of policies at the beginning and end of the year. So if the average number of policies at the beginning and end was 100, the number of policies lapsed was 72. ICICI Prudential Life Insurance Co. Ltd is next with 46% lapsation; Tata AIG Life Insurance Co. Ltd, Aviva Life Insurance Co. India Ltd and Metlife India Insurance Co. Ltd are the next that have a huge chunk of their policies dying in the first year itself. Typically in traditional plans lapsation occurs mostly in the first year. A policy is said to “lapse” when the premiums are not paid at any point in the life of the policy and the lapsation ratio tells us what part of the product portfolio died in a year. Let’s understand how the life insurance industry is broken up across products and regulation to get a better grip of what we are dealing with. The last few years have seen regulatory upheavals in the life of the insurance industry that has seen the industry change the product mix in favour of the higher cost products. Till 2009, around 80% of the industry was made up of unit-linked insurance plans (Ulips), but once the Ulip 2010 guidelines capped costs to an effective 2.25% over the life of the policy (over a 15-year period), the life companies tweaked their machines to produce and sell more “traditional” plans in which first-year commissions can still go as high as 35-40%. Traditional plans have been growing and now constitute at least half of the business, while Ulips are facing a negative growth. Ulips are almost absent from the sales portfolio of agents and banks selling life insurance. Insurers and sellers like traditional plans because the sellers get up to 40% of the premium as commission in the first year and the insurer usually gets to keep the entire premium if the policyholder lapses the policy (in Ulips, the maximum hit for customers is now Rs6,000 instead of the whole premium). The business now runs on hitting customers with a high-cost product and allowing it to lapse in the first three years of the policy. Why policies that die are a problem Lapsed policies show market immaturity where product manufacturers and buyers are still figuring out the right product mix. Says V. Viswanand, director and head (products and persistency), Max New York Life Insurance Co. Ltd: “In developed markets such as the US and the UK, the lapsation ratio is less than 10%; in Asian markets it is around 15-20%. Comparatively in India, the lapsation ratios are high— about 30%.” But a look at the age of the life companies that are seeing high lapsation rates causes some worry. Companies with more than 10 years under their belt should have figured the market and products out. But the top five names in the high lapsation ratio data are of companies that have been in business in India for at least 10 years. The insurers are pushing the blame on the rural business. Explains Jayant Dua, managing director and CEO, Birla Sun Life Insurance: “A bulk of our non-linked policies sold during the fiscal 2010–2011 was part of our micro-insurance pool. These are small-ticket policies. Excluding micro insurance policies, our 13th month persistency stands at 82% for year one. Micro insurance is yet in its early stages and we are taking active steps to improve customer education in the rural areas.” ICICI Prudential Life, which saw an adverse lapsation ratio of 46%, attributed it to its health insurance portfolio. Says Madhivanan Balakrishnan, executive director, ICICI Prudential Life: “The lapsation ratio in non-linked policies is attributable to the health insurance and the rural policies. Health insurance as a segment is very price sensitive in nature and hence when a customer finds a better product, he lets his existing policy lapse.” A third reason for lapsation are term policies. Says Deepak Sood, managing director and CEO, Future Generali India Life Insurance Co. Ltd: “Many insurers launched online term plans in the last couple of years. These plans are much cheaper than the regular term plans. Many customers shifted to these online term plans by lapsing their existing insurance policies.” Lack of transparency and data in life insurance does not give us a handle on getting a proper break-up of lapsation from all the parts of the life insurance industry, therefore it is difficult to see the full picture of the lapsation story. But it is clear that lapsation has been a tool for profits for some insurance companies. A March 2012 Goldman Sachs report shows that for 2010-11, lapsed profits for ICICI Prudential Life was Rs730 crore. Bajaj Allianz lapsed profits stood at Rs367 crore. HDFC Standard Life Insurance Co. Ltd earned around Rs223 crore and Max New York Life earned Rs184 crore. But these profits are shortlived as the report estimates that the gains from lapsed profit will disappear by the first half of FY13. With thousands of crore of profits coming from lapsed policies, would we be wrong to wonder if lapsation, as a deliberate means to pad up profit, is not a considered strategy for the insurance companies? What should you do? Not only if you own a lapsed policy, but if you are an existing policyholder, you need to worry about high lapsation rates. Explains Viswanand: “Typically, an insurer incurs significant acquisition costs in the beginning. It takes about three-seven years to achieve break-even on a policy. Bonuses in case of participating plans depend on three factors—costs, mortality and persistency. Insurance with ‘leaky buckets’ or high lapse ratios will find it progressively difficult to offer competitive rates of bonus.” It is in your interest to not let your policy lapse. Sadly, in a market that is run by commission-hungry distributors, the onus lies squarely on you. In order to ensure you don’t lapse your policy, start with buying an insurance policy for the right reason: protection.
Posted on: Sat, 08 Mar 2014 11:01:29 +0000
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