Importance of persistency in life insurance

Life Insurance is a long-term product that results in companies having a long-term association with customers. Persistency in Life Insurance, simplistically explained, is a measure of how long the customers renew their policies. This is one of the most important metrics in a Life Insurance Company and determines its long-term profitability and solvency.

The metric that is usually adopted by the Life Insurance industry for tracking renewal collection is the 13th-month Persistency of business i.e. what percentage of policies have been renewed after a year or what percentage of policies are in “active” status and not “lapsed” after a year of sourcing. Similarly, there are metrics and tracking on 25th, 37th, 49th and 61st-month Persistency to monitor renewal collection. Companies have dedicated teams and they allocate significant resources to enhance Persistency and improve renewal collection. Globally, one would observe that the benchmark for 13th-month Persistency is90% whereas for 61st month the benchmark is 65%. In India, there has been an increasing focus on improving Persistency amongst all Life Insurance players and that has led to an overall improvement. However, the average 13th-month Persistency of private life insurance companies has been in the range of 75 to 80% in the last couple of years though there are few with Persistency in the range of 85% to 90%.

Retaining a customer is one of the most significant as well as challenging aspects of a business today. A Company with a customer-first philosophy that focuses on policy renewals, ensures that not just the customer benefits from it, but the business also generates continual revenue. The profitability of a Life Insurance company is directly correlated with Persistency. So a higher persistent business means higher profitability for an insurance company. This happens as a result of the reduced effect of the expenses through the term of the policy. A persistent business helps recover the higher expenses in initial years, mostly associated with acquisition costs, over the policy tenure and hence ensures that the business that is written is generating profits in the longer run. The impact of Persistency on a life insurance product’s profitability varies i.e. Persistency of unit-linked products usually have a higher impact on profitability than that of traditional products.

The other most important aspect of the insurance business is maintaining solvency. The insurance business is mandated by the regulatory authority to maintain defined levels of solvency. Persistency and solvency are deeply intertwined. Higherpersistency implies higher renewal inflow, which in the long run, provides for higher resources for investments and earnings. An enhanced persistency also brings down the Sum at risk and reduces the burden of pay-out for death claims. The embedded value of a Life Insurance company is the present value of the future stream of profits that accrues only with the renewal premium. Hence, the importance of Persistency in a Life Insurance company and its linkage to profitability and solvency.

Customers are at the core of ensuring continuity of renewal premium. For a persistent business, the Company must ensure that the customer realises the financial need, assesses the product, consumes it and stays with it for the entire tenure to get the optimum benefit out of it. It is imperative for companies to ensure that the right product based on the customer’s needs is sold to improve renewals. A lot of time and effort is spent by companies in customer needs analysis, the suitability of the product and providing a benefit illustration so that the product benefits are understood by the customer before sales. This is critical for higher persistency. From a customer standpoint, higher persistency ultimately leads to improved customer benefits and claims pay-out and hence, higher customer satisfaction scores. In fact, higher persistency is certainly an indicator of customer satisfaction and loyalty for an insurance company.

Insurance companies have been investing heavily in technology and re-engineered processes to improve customer experience and hence improved Persistency. Starting from enhanced versions of the interactive services to launching voice recognition bots that serve you 24x7, servicing customers has come a long way. Most of the companies today are available on WhatsApp / other social media and are working towards real-time response and query resolutions. These initiatives are ensuring not just reduction in service TATs but “ease of operations” for customers and hence improved Persistency. The journey to success and sustainable profitable growth of life insurance companies would hinge around their ability to provide seamless service across touchpoints and the management team’s focus on customer experience.

Companies are also investing in initiatives that are improving the use of customer and “unstructured” data. Data Analytics is playing a key role in improving customer experience and persistency and the industry is seeing the increasing number of data scientists being employed. Machine learning, Artificial Intelligence, Data warehouses and data lakes have seen significant investment in the recent past in insurance companies implying the importance of data science and data analytics. Companies have built propensity models that predict Persistency at different stages of the customer lifecycle and by doing that it is able to allocate resources to where the propensity to renew is low. Data analytics is focused on providing insights to the companies on how to improve Persistency.

Across the globe, Life Insurance companies will continue to focus on improving the Persistency of their business by understanding customer needs, selling the right product through seamless online channels or trained distribution team, developing servicing infrastructure that provides great customer experience, creating “listening posts” to channelise customer feedback, developing operating models that support personalization and build capabilities to get customer insights by investing in data science.

By Atri Chakraborty, Chief Operating Officer, IndiaFirst Life Insurance Company Limited