Persistency Rate of Life Insurers

Persistency Ratio in Life Insurance

The persistency rate or ratio means, in life insurance it is a key metric that measures the percentage of policyholders who continue to pay their renewal premiums and keep their policies active over a specified period. It reflects how many customers are renewing their life insurance policies each year, indicating both customer satisfaction and the insurer’s service quality.

Calculation of Persistency Ratio:

The persistency ratio of life insurance companies can be calculated in two main ways:

• By Number of Policies: Persistency rate = (Number of policies renewed / Number of policies sold) × 100.
  For example, if 1,000 policies were sold and 870 were renewed, the persistency ratio would be 87%.
• By Premium Amount:
  Some insurers calculate the ratio based on the renewal premium received divided by total premium due.

The ratio is typically measured at specific intervals, such as:

• 13th month (after 1 year)
• 25th month (after 2 years)
• 37th month (after 3 years)
• 61st month (after 5 years)

Why it matters in Life Insurance?

• For Insurers:
  A high persistency ratio signals customer loyalty, strong brand reputation, and financial stability. It also ensures a steady revenue stream, helping insurers plan for growth and maintain operational efficiency.
• For Customers:
  A high persistency ratio suggests that the insurer provides good service and that policyholders are generally satisfied, making it an important factor to consider when choosing an insurance provider.

Industry Benchmarks

• A persistency ratio of 80% or higher is generally considered good in the life insurance industry.
• Ratios tend to decline over time: for example, after five years, the persistency ratio in India can drop to around 50%.

Key Points:

• A high persistency ratio on life insurers indicates satisfied, loyal customers and a healthy insurance company.
• A low persistency ratio can be a sign of poor customer service, unattractive products, or financial instability among policyholders.
• Persistency ratio is a crucial factor to check before buying a life insurance policy, alongside other metrics like claim settlement ratio and solvency ratio.

Summary:

The persistency ratio is percentage of policyholders who continue to pay their renewal premiums and keep their policies active over a specified period. Persistency ratio is a vital indicator of an insurance company’s ability to retain customers and deliver satisfactory service over time.

Regards,

Honvest Team.