The life insurance industry is seeing a sharp rise in policy lapses as subscribers are not paying renewal premiums on time.
The rate of policy lapses in the country has increased more than three-fold in the last three years — this is the highest since the industry was opened to private players in 2000-01.
Industry-wide data available from the Insurance Regulatory and Development Authority (IRDA) and the Life Insurance Council revealed that the retention ratio which was at 95 per cent in 2002-03 had declined to about 83 per cent in the year ended March 2009 (See chart).
A decline in the retention ratio means an increase in the policy lapse ratio.
While the retention ratio fell 2.5 percentage points to 92.51 per cent by 2005-06 from 95 per cent in 2002-03, between 2006-07 and 2008-09 it declined nearly 10 percentage points to 82.96 per cent. Besides, the lapse ratio had increased significantly in 2008-09 compared with the previous years.
A large part of the rise in the lapse rate is attributed to the introduction of unit-linked insurance plans (Ulips) and their mis-selling. Currently, more than 75 per cent of all life insurance policies sold in the country are Ulips.
In most cases, Ulips were sold as an investment instrument rather than as an insurance product; a majority of those who bought them didn’t properly understand the risks and charges under such policies.
In 2008-09, the bloodbath in stock markets affected fund values under the unit-linked plans, leading to the non-renewal of policies.
“We have seen higher policy lapses under unit-linked plans than under traditional schemes,” said Sunil Kakkar, chief financial officer of Max New York Life, a private sector life insurance company.
In many cases, Ulips were wrongly sold to people, who could not take market risks.
In other instances, agents sold regular premium policies as single-premium policies to customers. “To pre-empt the occurrence of such incidents, we made our policy proposal forms in different colours for single-premium and regular-premium policies,” said P. Nandagopal, chief executive officer of Reliance Life Insurance Company.
Even the insurance regulator had expressed concern many times over the gross mis-selling of Ulips.
During a visit to the city a few months back, IRDA chairman J. Hari Narayan had expressed apprehension about the predominance of Ulips in the portfolio of life insurers. “The percentage of Ulips has to be brought down to at least 50 per cent if life insurers want business sustainability,” he had said.
However, it is not solely because of the high commission structure of individual agents that mis-selling happens.
Agents have to meet steep sales targets, failing which their agency gets terminated.
The high attrition rate of individual agencies explains the high prevalence of “orphan” policies.
Source: The Telegraph,Kolkata,13/10/2009.
