FOR EXISTING POLICY
FOR NEW POLICY
The persistency ratio helps to understand how persistent policyholders have been in renewing their policies each year. It is a vital indicator of the policy and insurance company’s performance. The higher the persistency ratio, the better it is.
Before buying life insurance, you must look at several aspects. These include the company’s credibility, plan features, premium amount, coverage offered, claim settlement ratio, etc. Some other ratios, like the solvency ratio and persistency ratio, highlight the performance of the life insurance provider.
If a policyholder continues to pay the premium on time over a period, it reflects their satisfaction with the insurer. The persistency ratio helps you check this metric before investing in a life insurance plan.
Here is a guide with information on what persistency ratio in insurance is and persistency meaning for a customer.
What Is Persistency Ratio in Insurance?
The persistency ratio refers to the percentage of policyholders who pay their renewal premium. It is a benchmark for the quality of sales made by the insurer. Moreover, it highlights the commitment of a customer to renew the policy every year.
The persistency ratio is measured at different stages. For the first year, the calculation is done in the 13th month. For the second year, the 25th month. For the third year, the 37th month, and so on.
The persistency in insurance in the 13th month measures the premium paid for renewal by the policyholder at the start of year two.
For example, Sunita purchased a policy in February 2021. She paid its renewal premium next year, due in February 2022, before March 2022. The policy is said to be 13th-month persistent. But, if she does not pay the premium due in February 2023 by March 2023, the policy will be considered non-persistent for the 25th month.
The 13th-month persistency indicates policyholders' satisfaction with the insurer’s products and services, while the 61st-month persistency signals loyalty towards the insurer.
A higher ratio implies that the existing policyholders are satisfied with the product portfolio, customer service, after-sales service, product utility, product returns, etc.
Importance of Persistency in Life Insurance
Persistency is vital for insurance companies and customers. Let us break it down for a better understanding.
Importance for insurance companies
Persistency rates reflect the trust customers have in an insurance provider. If customers continue to renew their health or life insurance plans with a company, it means they are satisfied with its services.
A high persistency ratio helps to build credibility and attract new customers to the company. Conversely, a low persistency ratio damages a company’s reputation. It notifies the company that they need to understand the customer’s needs.
Thus, a company must maintain a high persistency ratio to generate more revenues and cash inflow. It aids in overall growth and promotes long-term financial gains.
Importance for customers
Insurance is also an investment product, making a high persistency ratio beneficial for customers. Continuing to renew and invest in the plan can help avail of tax* benefits for longer.
Besides, since the policy offers financial protection to meet medical expenses, the insurance coverage doubles up as your emergency fund. You have a safety net to fall back on and save more money in the long run.
What Causes a Persistency Ratio to Decline?
The common reasons for a low persistency ratio are:
Policyholders do not value the policy.
Customers do not understand the benefits of the policy.
The insurer does not offer satisfying after-sale service.
The product’s performance is unsatisfactory.
There are better and more advanced products in the market.
The insurer’s claim settlement ratio is low.
Financial distress due to the country’s economic instability.
The first four reasons point at the insurer for the customer not willing to pay the premium. Therefore, a low persistency ratio indicates poor performance of the insurer with the existing customer.
Every customer wants to associate with an insurance company that has the most satisfied customers. This makes the persistency ratio a crucial factor in your buying decision. The ratio is a replication of customer reviews for brands.
How To Calculate the Persistency Ratio?
There are two ways to compute the ratio of persistency in life insurance. You can view the annualised premium or the number of renewed policies. The typical formula is as follows:
Persistency ratio = (number of policyholders paying the premium/net active policyholders)*100
So, if a company’s persistency ratio for a particular year is 80%, it means of the total 100 written insurance policies, 80 policyholders opted for a renewal.
In the first year, the 13th month of the policy term is used to determine the policy’s persistence. Similarly, the 25th month is used for two years, the 37th month for three years, the 61st month for five years, and so on.
Summing Up
Every life insurance company tries to improve the persistence of its business by understanding the needs of the customers. The persistency ratio is the percentage of customers renewing their life insurance policy every year. If the persistency ratio is high, it means that the customers trust the company and are satisfied with its services. On the contrary, if it is low, customers are leaving the company due to dissatisfaction.
