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What is the Persistency Ratio and Why Does it Matter to the Health Insurance Sector?

The persistency ratio is crucial for health insurance companies, indicating customer loyalty and satisfaction. A high persistency ratio reflects strong customer relationships and a sustainable business model.

  • 12,306 Views | Updated on: Dec 28, 2023

Insurance companies need to understand their customers to succeed. One way to do this is to look at the persistency ratio. This is the percentage of customers who renew their policies. A high persistency ratio means customers are happy with their insurance company and likely to stay with them.

When you buy a health insurance plan, there are several aspects that you must consider. These generally include the claim settlement ratio, the client’s reputation, the features of the plan, the premium and coverage amount, etc. Another important factor that plays a vital role is the persistence ratio. Here is everything you need to know about the persistence ratio and its importance to the health insurance sector.

What is the Persistency Ratio in Insurance?

The persistency ratio is the number of total policies an insurer has for renewed or in-force policies. So, for instance, an insurance company sells 100 policies, but out of these, only 80 policies are renewed or active at a given time. The persistency ratio, in this case, will be 80:100.

The persistency ratio shows the number of policyholders paying premiums for active plans. This ratio can be calculated for a single financial year or a series of years.

Why is the Persistence Ratio Important?

The persistence ratio is important for insurance companies as well as customers. Here’s how:

Importance of Persistency Rates for Insurance Companies

Persistency rates are critical for insurance companies, reflecting customer loyalty, brand reputation, and overall financial health. Insurance companies can cultivate a loyal customer base by prioritizing customer satisfaction and providing exceptional service, ensuring sustainable growth and profitability in the competitive insurance landscape.

Predictable Revenue Stream

Consistent policy renewals provide a predictable revenue stream for insurance companies, enabling them to plan for future growth and investments. This stability is essential for maintaining financial health and operational efficiency.

Enhanced Customer Lifetime Value

Long-term policyholders contribute to the overall lifetime value of a customer. Insurance companies can maximize this value by offering loyalty programs, personalized services, and value-added benefits, further strengthening customer relationships.

Stronger Competitive Advantage

High persistency rates serve as a competitive advantage for insurance companies. They demonstrate a commitment to customer satisfaction and quality service, attracting new customers and enhancing the company’s reputation in the market.

Positive Impact on Brand Reputation

A loyal customer base fosters a positive brand image and reputation for insurance companies. This positive perception attracts new customers and reinforces the company’s position as a trusted provider.

Enhanced Customer Insights

Analyzing persistency rates provides valuable insights into customer preferences, satisfaction levels, and areas for improvement. Insurance companies can use these insights to tailor their products, services, and marketing strategies to meet their policyholders’ needs better.

Reduced Administrative Costs

Retaining existing customers reduces the administrative burden associated with onboarding new policyholders. This includes paperwork, underwriting processes, and agent interactions, leading to lower operational costs.

Importance of Persistency Rates for Customers

High persistency rates reflect customer satisfaction with the insurance provider, products, and services. Here is why persistency rates matter for customers of healthcare insurance:

Predictable Healthcare Expenses

Consistent policy renewal ensures that customers have uninterrupted access to healthcare coverage, preventing unexpected financial burdens due to medical emergencies.

Continuous Coverage History

Maintaining a long-standing relationship with a single insurance provider allows for the accumulation of medical history, which can be beneficial for future coverage decisions and underwriting processes.

Familiarity with Policy and Provider

Ongoing engagement with the insurance company fosters familiarity with the policy’s terms, benefits, and renewal procedures. This familiarity can reduce the hassle of switching providers and navigating new policy details.

Established Rapport with Care Providers

Maintaining a consistent insurance plan often allows patients to build relationships with their healthcare providers, leading to better continuity of care and personalized treatment plans.

Reduced Administrative Burden

Continuous policy renewal eliminates the need for frequent applications, underwriting processes, and paperwork, streamlining the healthcare experience for customers.

Indicator of Customer Satisfaction

High persistency rates suggest customers are satisfied with the insurance company’s coverage, customer service, and overall value proposition.

What can Insurance Companies do to Improve Their Persistency Ratio?

Insurance companies can implement various strategies to enhance their persistency ratio, ensuring that policyholders continue renewing their policies and maintaining a loyal customer base. Here are some effective approaches:

Understand Customer Needs and Preferences

Prioritize understanding the unique needs and preferences of policyholders. Conduct surveys, analyze customer feedback, and engage in direct interactions to gain insights into their expectations, concerns, and pain points. This understanding will enable the company to tailor products and services to address customer needs better, fostering loyalty and reducing the likelihood of policy lapses.

Offer Competitive Pricing and Attractive Benefits

Evaluate market trends and competitor pricing to ensure that premiums are competitive and aligned with the perceived value of the policy. Consider offering attractive benefits, such as additional coverage options, discounts for loyalty, and value-added services, to enhance the overall value proposition and encourage policyholders to continue their coverage.

Simplify Policy Administration and Claims Processing

Streamline policy administration processes to make it easy for policyholders to manage their coverage, understand their benefits, and submit claims. Implement efficient claims processing procedures to ensure timely and fair resolution of claims, minimizing frustration and maintaining customer satisfaction.

Implement Effective Retention Strategies

Analyze lapse data to identify patterns and underlying reasons for policyholders canceling their coverage. Develop targeted retention strategies to address these issues, such as offering personalized renewal incentives, addressing common concerns, and providing proactive communication.

How is the Persistency Ratio Calculated?

Persistency ratio is calculated at the end of each policy year. For example, the persistency ratio for a policy that is one year old would be the percentage of policyholders who have paid their premiums for the entire year.

It is either determined by the annualized premium or the renewed policy quantity. A single financial year or a string of financial years may be used to determine the ratio. The 13th month of the policy term is used to compute a policy’s persistency ratio during the first year. In a similar manner, it will be determined for two years in the 25th month, for five years in the 61st month, and so on.

The formula for calculating the persistency ratio is:

Persistency Ratio = (Number of policies in force at the end of the year) / (Number of policies in force at the beginning of the year) * 100

For example, if an insurance company has 1000 policies at the beginning of the year and 950 policies at the end of the year, then the persistency ratio would be 95%.

Persistency ratios can vary widely from company to company and from industry to industry. However, a persistency ratio of 85% or higher is generally considered to be good. A persistency ratio of below 85% may be a sign of problems with the insurance company, the product, or the policyholders themselves.

Does Persistency Ratio Matter for Online Buyers?

Certainly, it should. The persistence ratio actually counts a lot more to online life insurance customers. Since there is no financial counselor to act as a middleman between you and the business, the insurer must continue communicating with you. The insurer is respons

Summing it Up

In the insurance industry, it is important to understand how customers behave and what they want. One way to measure how engaged customers are is by looking at the persistency ratio. While no one can predict the future, it helps to pick a dependable insurer to reduce the chances of surrendering the policy at a later stage. By understanding the importance of persistency ratios and developing strategies to improve them, insurance companies can build stronger relationships with their customers and grow their business over time. As a customer, it is also important for you to ensure you check and compare the persistency ratio before investing.

Key Takeaways

  • The persistency ratio is a measure of how many policyholders renew their insurance policies each year.
  • A high persistency ratio is important for insurance companies because it indicates that customers are satisfied with their products and services.
  • It can also help insurance companies attract new customers and reduce their administrative costs.
  • Insurance companies can improve their persistency ratio by offering competitive rates and premiums and providing excellent customer service.

FAQs

1

What is the persistency ratio for IRDIA?

The persistency ratio for IRDIA is not publicly available. However, the persistency ratio for the Indian life insurance industry as a whole is around 80%. This means that, on average, 80% of life insurance policies in India are renewed each year.

2

Which ratios should a customer consider before buying life insurance?

Before buying a life insurance policy, customers should consider the following ratios:

Claim settlement ratio: It measures the percentage of claims that an insurance company pays out. A high claim settlement ratio is a good sign that the insurance company is financially stable and will be able to pay out claims when needed.

Solvency ratio: It measures an insurance company’s ability to meet its financial obligations. A high solvency ratio is a good sign that the insurance company is financially stable and will be able to meet its obligations to its policyholders.

Expense ratio: It measures the percentage of an insurance company’s premiums that are spent on expenses. A low expense ratio is a good sign that the insurance company is efficient and is not wasting money on unnecessary expenses.

3

When is the persistency ratio calculated?

The persistency ratio is calculated at the end of each policy year. For example, the persistency ratio for a policy that is one year old would be the percentage of policyholders who have paid their premiums for the entire year.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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