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Persistency rate of insurance policies
Feb 26, 2014

Insurance companies face varied challenges. Many a times the focus is on those issues that affect new business generation. But we tend to ignore the renewal aspect of the business. And we lose out on an important metric. Here the persistency rate comes into picture. Persistency refers to the volume of business that a life insurance company is able to retain. This rate can be gauged with the help of "persistency ratio". It implies "percentage of an insurance company's already written policies remaining in force without lapsing or being replaced by policies of other insurers." Simply put, persistency = No. of Clients Paying the Premium / Net Active Clients * 100.

A high persistency rate is indicative of satisfied customer and effective sales practice. Persistency is a critical factor in the viability and success of insurance companies. Hence, they constantly look for ways to increase this ratio. Also, the Insurance Regulatory and Development Authority (IRDA) have put in place a persistency rate of at least 50% to be maintained by the life insurance agents. This percentage was later raised to 75% in the interest of the policyholders and the insurance company per se. However, the records of past 3 years (FY11-FY13) stand dismal. The persistency rate has been hovering in the range of 55%-65% in these periods as can be seen in today's chart. This indicates that lesser than 65% policies were renewed. Later the regulator asked the agents to set their own persistency rates. That is indeed a bad news! Mis-selling and mere focus on new business have knocked the persistency rates. This can prove detrimental to the industry and the customers alike.

Data source: Live Mint

This Chart Of The Day was published in The 5 Minute WrapUp - Why Warren Buffett doesn't watch business channels and even you shouldn't

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