Despite an increase in their persistency ratios, most of the life insurance companies in India have at least 25% of policyholders who do not pay premium in next year. In terms of number of policies, the dropouts are much higher with nearly a third of buyers not paying their annual dues.
According to data released by IRDAI the 13th month persistency for the LIC in terms of policies sold was 64% in March 2017. This means that of the policies sold in the previous year, 36% of the purchasers did not renew them in the subsequent year. The figure improved to 66% in 2018, but representing a 1/3rd dropout rate.
According to sources in LIC, the dropout ratio is higher among low-value policies and it improves when the renewals ratio is checked as a percentage of premium rather than the number of policies sold. However, even when it comes to premium, there are only 76% renewals in the second year.
The lapsed policies are almost a total loss to the policyholder. In the case of a lapse within a year, the policyholder loses most of his money since the insurance company books all its costs, including commission, upfront in the first year. In 201617, LIC sold Rs 22,178 crore worth of regular premium policies. This was 44% of the regular premium collected by the industry. Extrapolating the 24% lapse ratio to the fiscal year numbers would indicate that premium worth over Rs 5,000 crore has lapsed for LIC alone. Of the 1.89 crore policies it sold in FY17, a third would have lapsed.
