An increase in the lapsation and surrender of policies has turned out to be a blessing in disguise for life insurers – the trend has increased their profits and surpluses.
Tabassum Inamdar and Shyam Srinivasan, analysts with Goldman Sachs said in a note the main drivers of the profit made by Indian life insurers in the recent past have been lower volume growth, lower expenses, higher surrender and lower persistency ratios. Surrender and lapsation charges, as a percentage of net profit before tax, stood at 67% in fiscal 2012 for HDFC Life. Meaning, a third of the policy holders who took policies in fiscal 2011 did not renew. For ICICI Prudential and Kotak Life, the comparable numbers are 62% and 58%, respectively.
Profit after tax (PAT) for majors such as HDFC Life, ICICI Prudential, Bajaj Life and Kotak Life have shown a rising trend in the past two years.
For Bajaj Allianz, PAT rose 24% in the previous fiscal. Similarly, for ICICI Prudential and SBI Life, it went up by 71% and 51%, respectively.
Data on surrender and lapse profits are not available for traditional plans.
DNA Money contacted eight private life insurance players for getting surrender details on such plans and all of them declined to disclose details.
“Surrender and lapsation profits from traditional plans are often understated by insurers because of the lack of availability of such data,” added the analysts.
Almost all players club these profits with surrender and other charges.
And mix it with the reserves created from the surplus. So the specific data are not available in the financial statements of insurers.
As a result, conservation ratio -- which shows how much of business underwritten in the previous year is getting renewed -- is showing a volatile trend, with the figure for Bajaj Allianz dropping to 56.4% from 58.3%. The scene is not very different at most others.But the party is coming to an end.
With new regulations in place on guaranteed surrender value (GSV), insurers will have to return policy holders more money.
The Insurance Regulatory Development Authority said policyholders need to be paid a surrender value of 50% of the premium paid if they surrender in the first two years and the surrender value increases as they pay premium for more terms.
After 5 years, customers will get 90% of the premium paid and this change in rule will keep insurers on their toes. Currently the policyholders get only 30-35% of their premiums as a surrender value when they exit after 3 years.
Ergo, it has become crucial for insurers to keep a tab on the surrender and lapsation ratios.
Insurers say with less misselling cases, they can keep policy surrenders under control.
“Regular calls, SMS alerts will be sent to policyholders for reminding them on premium payments and by every means we will try to prevent surrenders. The sales team will be consantly monitored for checking the mis selling cases so that there will be less probability for surrenders,” said an official from the industry.