Why persistency ratio matters in insurance

Maintaining continuity by paying premiums on time over a period only comes when you are satisfied with the policy provided by your insurer. And to check this metric, you should first understand the ‘persistency ratio’ before buying a life insurance policy.

In this piece, we take a look at what is persistency ratio and what it means for you.

The words ‘persistency ratio’ may seem like financial jargon to confuse policy buyers. However, it is a simple concept that lets policy buyers know the insurer’s performance in the previous year.

“Persistency ratio is the proportion of policyholders who continue to pay their renewal premium. It is a barometer for the quality of sale made by the insurer. Renewing the policy ensures that customers and their families continue to have a safety net," said Ashish Rao, chief of customer experience & operations, ICICI Prudential Life Insurance.

Lalitha Bhatia, chief operating officer, Ageas Federal Life Insurance, said, “Persistency ratio is derived by understanding the number of premiums paid by policyholders against the number of premiums payable and measured at different stages in the life of the policy. These stages are like first year (13th month), second year (25th month), etc."

The 13th month persistency measures the renewal premium paid by the policyholder at the commencement of the second year. Similarly, the 37th-month persistency and 61st-month persistency indicate the percentage of policyholders who choose to continue their policies at the end of the third and fifth year. For instance, a policy issued in January 2020 is said to be 13th-month persistent if the policyholder pays the premium due in January 2021 by February 2021. The same policy will be categorized as non-persistent for the 25th month if the policyholder doesn’t pay the premium due in January 2022 by February 2022.

“The persistency ratio disclosed by life insurers considers both the number of policies by count and premiums that continue with them," said Yusuf Pachmariwala, executive vice-president, & Head of Operations. “While the 13th-month persistency shows how satisfied policyholders are with the products they have purchased, the 61st-month persistency indicates policyholders’ loyalty towards the insurer and the level of satisfaction with overall services, as policyholders are very unlikely to discontinue a policy after six years," Pachmariwala added.

Basically, a higher percentage of policyholders renewing their policies with a particular insurer signifies that the product features and benefits match the needs of buyers. Moreover, renewing the policy ensures policyholders and their families continue to have the right protection cover. The persistency ratio paves the way for building a long-term relationship between a policy buyer and the insurer.

When the insurance sales are value-based and are backed up by proper service and all queries of the buyers are handled promptly, in that case, the buyer will not only be satisfied but also can suggest the transparency and loyalty of the insurer to others.

Source: Live Mint