Ask any distributor of financial products and he would affirm that selling life insurance is among the most challenging tasks. One of the key reasons it can be demanding is it requires convincing a policyholder to make regular premium payments over an extended period of time. The cumulative impact of policies, which pay renewal premiums, in your book is known as persistency.
Persistency has been an issue of utmost importance for the life insurance sector. It impacts all stakeholders — the insurer, distribution channels and policyholders. From a consumer’s point of view, a lapsed policy (or, a prematurely surrendered policy) can result in financial loss and denial of death benefit, in case of a claim. For distributors, it results in loss of renewal income. For life insurers, declining persistency levels typically result in an increased pressure on revenue and reduced profitability. However, it is a difficult issue to address for most insurers across the world. Persistency levels are affected by several factors, including the economic environment, product design, quality of the initial sale, a customer’s experience with the insurer and renewal and premium collection practices.
One of the recent research reports, which compares Indian insurers with their Asian peers, shows the former have a significant scope for improvement on the persistency performance. The 13-month persistency ratios in India are at 53-80 per cent, far below the 78-94 per cent for their Asian peers.
Studies have identified the most relevant issues likely to impact the policyholder’s decision to continue paying premiums. Some of these include:
- Suitability, combined with affordability, is the most important reason for continuing the policy. If the policyholder finds the policy continues to meet his needs years after he bought it, he is more likely to continue paying premiums. This seemingly straightforward factor is linked to the policy, policyholder, agent, as also the macroeconomics which ensures he can afford the premiums.
- Product performance, especially in a unit-linked plan, is an important parameter driving the policyholder to pay his premiums. If product performance meets the policyholders’ expectations, they are likely to continue paying premiums — a fact corroborated by studies, which show a link between equity market and persistency.
- Changes in personal circumstances like a job loss or migrating to a job with insurance benefits may make the product unsuitable or unaffordable to the policyholder, leading to lapsing. Studies cite unaffordability from loss of income as one of the biggest factors for discontinuing a policy.
- After product design, the sales channel plays the most important role in ensuring that persistency is maintained. Need-based selling is extremely important and plays a significant role in the entire milieu. Customer segmentation and need analyses are key parameters that have to be assessed before selling a product. Thus, if a right product is sold to the customer, he naturally becomes your ambassador and, hence, effective sales force training is fundamental.
- It is also important that customers go through the product details and understand the terms and conditions. There are numerous provisions for the customers to best safeguard their interest when buying life insurance products.
- From the organisational perspective, it is important to set up a dedicated persistency task force with cross-functional representation from functions such as marketing, operations, distribution, information technology and finance. When technology is rightly leveraged to enable persistency with an analytical approach, it helps address the persistency problem at a granular level.
Increase in persistency is a win-win situation for all stakeholders. Apart from ensuring sustained life cover for policyholders and commissions for agents, it can result in revenue accretion to the company.
Jayant Dua
MD & CEO, Birla Sun Life Insurance