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 it. In case of the non-linked business (term, group, health and endowment plans) for Birla Sun Life Insurance, the lapsation ratio was as high as 72% for 2010-11.
Lapsation ratio 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.
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.
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. “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%,” said V Viswanand, director (products and persistency), Max New York Life Insurance. “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 for at least 10 years.
“A bulk of our non-linked policies sold during 2010-11 was part of our micro-insurance pool,” said Jayant Dua, managing director and CEO, Birla Sun Life Insurance. “These are small-ticket policies. Excluding micro insurance policies, our 13th month persistency stands at 82% for year one.” ICICI Prudential Life, which saw an adverse lapsation ratio of 46%, attributed it to its health insurance portfolio. “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,” said Madhivanan Balakrishnan, executive director, ICICI Prudential Life.
It is difficult to see the full picture of the lapsation story due to lack of transparency and data from all the parts of the insurance industry. But it is clear that lapsation has been a tool for profits for some insurance companies. (See graphic) 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 firms?
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. It is in your interest to not let your policy lapse. In order to ensure you don’t lapse your policy, start with buying policy for the right reason: protection.