Per the IRDAI report for 2015-16, the total premium income for the Life Insurance industry in India amounted to Rs. 3.67 trillion (3.67 lakh crores). Of this 3.66 trillion, only 62.16 per cent were renewal premiums, and the remaining 1.38 lakh crores were first-year premiums (FYP's). When you consider that Life Insurance is, by and large, meant to be a recurring annual payment that typically lasts between ten and twenty years, and couple this with the fact that the industry underwrote more than 1 trillion of FYP's in the previous two years as well, a valid question comes up - where are all the FYPs disappearing over the years that follow?
Even a cursory mulling of the above stated numbers clearly brings to light the leaky bucket the Life Insurance in India is. That is, while many us rush in to buy policies each year, the number of us that will actually go on to pay the 2nd, 3rd, 4th and 5th year premia for our policies is abysmally low. While India figures high atop the global league tables when it comes to sourcing new business premia, it cuts a sorry figure when it comes to renewals performance.
The industry, and the regulator, mutually recognise that the persistence problem can be extremely damaging in the long and short run. In 2011, the IRDAI had attempted to come up with a hard-handed strategy to shore up persistency numbers, when it had mandated that a minimum 50 per cent achievement on this key business parameter would be required for the renewal of an agent's license, going up to 75 per cent in a few years' time. However, the regulator was forced into a row back of this clause in 2014, in light of the steady attrition within the industry's agent-force. If anything, the fact that the regulator could be arm-twisted into reversing such a landmark decision, and that agents could attrite from the work force when mandated to sell policies sustainable and honestly, stands to highlight the deep-rootedness of the problem even further.
Persistency, in simple terms, can be defined as the percentage of policies sold in a given year that gets renewed thereafter. Typically, the 2nd year (13th month) and 5th year (61st month) persistency figures are tracked closely as a global best practice. In India, 13th month persistency stands at approximately 60% and the 61st month at 22 per cent. Globally, these numbers are closer to 90 per cent and 65 per cent respectively. So not only do we lag our global peers in this respect, but we lag them by miles!
The Persistency of an Insurer's book is quite likely it's most critical industry business parameter. Every stakeholder in the Life Insurance ecosystem is affected by it. Clients who do not renew their policies will end up forfeiting all, or most, of the premiums already paid, resulting in a direct and tangible financial loss for them. For insurers, themselves optimising a client's lifetime value (CTLV) is heavily contingent upon high levels of renewals and persistency. For agents, repeat business, and referral business; two of the key drivers of any long term sustainable business growth, are heavily dependent upon the client recognising the value of the financial solution sold to them, and thereby staying put for the long run. For the regulator, nurturing a cleaner and more robust distribution ecosystem has always been a key priority; by driving and increasing persistency, they will indirectly be tugging the cart in the right direction.
And yet - there's no silver bullet in sight. Digital channels have shown some promising results when it comes to raising persistency, but is a fully digital distribution strategy really feasible in India right now? Will the regulator tackle the problem with an iron fist not lead to further attrition within the industry's already reeling agent force? While mis-selling is undoubtedly one of the chief contributors to the ludicrously low persistency number, just how can command and control structures be optimised to ensure a sizeable uptick in the quality of sales made? What processes, systems and strategies can be issued and driven from the CEO's office that can make persistency a legitimate and rewarding business goal? How can compensation structures for agents be tweaked, align them better with customer interest? While these questions hand in the air, for now, we look forward to a spirited debate on this contentious topic during the first BW Businessworld Life Insurance Summit, scheduled on 28th April in Mumbai. Watch this space for more updates.
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