Lapsation in Life Insurance: The No-Win Deal

Volume VI, No.
August 2008
Lapsation in Life Insurance
The No-Win Deal
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IRDA Journal (Vol 6 Iss 8).pmd 1 05-08-2008, 23:29
Editorial Board
J. Hari Narayan
C.R. Muralidharan
S.V. Mony
K.N. Bhandari
Vepa Kamesam
Ashvin Parekh
Editor
U. Jawaharlal
Hindi Correspondent
Sanjeev Kumar Jain
Printed by Alapati Bapanna and
published by J. Hari Narayan on behalf of
Insurance Regulatory and Development Authority.
Editor: U. Jawaharlal
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© 2007 Insurance Regulatory and Development Authority.

Please reproduce with due permission.
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and Development Authority.

From the Publisher
I
n the aftermath of liberalization of insurance stock of all the policies wherein the premiums have
business in India, life insurance has made rapid not been paid even after a period of one month
strides of progress, surpassing even the most from the due date.
optimistic forecasts. While this very healthy trend
The first and foremost reason for a policyholder to
has been observed in acquiring new life insurance
prefer not to stick to his commitments is a possible
business, retention has somehow not matched this
disillusionment. Several policyholders realize after
growth. Life insurance contracts are long term in
the contract has been concluded that their
nature and the product designing anticipates the
requirements have not been taken care of by the
continuation of the contract for the entire length
terms of the policy and hence they tend to
of its selected duration. The costs of acquiring new
discontinue further payment of premiums. While
business are huge, apart from the fact that the
no single factor can be isolated for such a situation,
distributor’s remuneration is also at its peak during
the distributor has a huge role to play in this regard.
the initial years. All this presupposes that unless
It would hardly need to be emphasized that a proper
the contracts run for their full time, it ends up as a
need identification of the prospect; followed by a
losing proposition for the life insurers. Apart from
need-based selling would go a long way in arresting
making the business economically non-viable,
the high lapsation ratios of life insurers. Life
lapsation also results in damage to the reputation
insurers would do well to inculcate such practices
of the insurers.
in their distribution personnel at the time of
Conversely, failure to keep the contracts in force initiating them into business. It would also need
ends up in a huge loss to the policyholder as well, spreading awareness among the policyholders.
notwithstanding the payments of surrender values,
‘Lapsation in Life Insurance Contracts’ is the focus
if any. The basic purpose of obtaining life insurance
of this issue of the Journal. Despite the promise to
– to serve as a safety net in the unfortunate event
pay the sum assured on the happening of the event,
of the loss of the breadwinner – itself takes a
repudiation of claims is still incidental to insurance
beating and could lead to the possibility of the
business. ‘Claim Repudiation in Insurance’ will be
dependents being orphaned. If both the parties to
the focus of the next issue of the Journal.
the contract are at a losing end, it remains
paradoxical that lapsation continues to be in high
percentages. Further, lapsation itself has been
differently interpreted by various insurers and lacks
uniformity. In order to make a meaningful
comparison between several insurers and analyze J. Hari Narayan
the situation, it would make good sense to take

F O C U S Lapsation of Life Insurance Policies
- V Rajagopalan 8
Persistency of Business
- Rajasekhar Mallela, Venkata Madhukar Kanagala, Sreenivasa
Rao Kagolanu and Purnananda Kumar Divakaruni 13
Policy Lapsation in Life Insurnace

- David Chandrasekharan 20
Retention of Life Insurance Business

- Amitabh Verma 23
I S S U E
Business Retention in Life Insurance

- H.O. Sonig 25
Conservation of Life Insurance Business

- Dr. G. Gopalakrishna 28
Statistics - Life Insurance 4

In the air 6
Vantage Point
U. Jawaharlal 7
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FOLLOW THROUGH
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\y ƒy ∫Áƒ 41 31 and Technical Provisions
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Statistics - Non-Life Insurance 47

from the editor
Importance of Retention Ratios

- Life Insurance Business
T
he lapsation ratios of several life insurers are illogically high – illogical because when the insurance
contract has been entered into voluntarily for a certain number of years, why should there be justification
for terminating it half way through? If one looks at the reasons for such a phenomenon, several factors
emerge that make the policyholder unilaterally go back on his commitment. It is even possible that the contract
has not been entered into voluntarily but the policyholder has been coerced into it, at least morally. It is not
surprising that such contracts tend to experience premature closure.
While it is common knowledge that a satisfied client would continue to stay with the insurer for the entire
period of contract; an oft-repeated argument in the area of lapsation, especially in emerging markets, is that
the agent has filled-in the proposal form and hence the policy does not cater to the policyholder’s needs. It has
to be realized that in filling the proposal, the agent acts on behalf of the prospect. Further, the distributor
should enlighten the applicant on all matters pertaining to the contract to ensure that need-based selling is
accomplished. Also, if the distributor puts at the top of the agenda the prospect’s needs rather than his own
personal interests, it is sure to lead to better results in business retention. The free-look period that has been
introduced in the liberalized regime should act as a great trigger for promoting long-term conservation of life
insurance business. Unfortunately, this has not been witnessed to a great extent, owing to the low awareness
levels of the clientele.
Lapsation brings in its fold huge disadvantages – both for the insurer as well as the insured. The insured suffers
by way of interruption in coverage of risk, sometimes unknowingly, that could lead to disastrous results;
sometimes, he may even face denial of risk coverage in light of the habitual lapsation. For the insurer, it
certainly hampers the expected cash flows upsetting the Asset Liability Management; and is a drain on its
resources. It would be in the interest of the life insurers to focus on this aspect while training their personnel.
Besides, there should be a periodical assessment of the various reasons for lapsation; and proper measures
should be taken to reverse the trends.
The focus of this issue of the Journal is on ‘Lapsation in Life Insurance Business’. We open the issue with an
article by Mr. V. Rajagopalan who discusses inter alia the vulnerabilities that insurers are exposed to on
account of early lapsations. In the next article, a team of life insurance domain consultants project ‘Persistency’
of business as the fifth ‘P’, which in their opinion, is as important as the other four ‘P’s of marketing. Mr.
David Chandrasekharan brings in his huge experience in life insurance domain in the next article, in which he
talks about the important role that the distributor plays in ensuring that life insurance contracts do not die
an immature death.
One significant adverse feature of high lapsation in life insurance is the financial crisis that it brings about, both
for the insurer as well as the insured. Mr. Amitabh Verma discusses this aspect in detail in his article. In the
article that follows, Mr. H.O. Sonig not only details various reasons for lapsations but also makes suggestions for
improvement in this regard. In the last article on the focus, Dr. G. Gopalakrishna elaborates upon the different
situations that lead to lapsations and the remedial measures adopted by life insurers. In the follow-through
section that follows, Ms. Karpagam Sankaranarayanan talks about the importance of a proper Asset Liability
Management for insurers and the technical provisions associated with it.
Although in an insurance contract, the insurer promises to pay the assured sum on the happening of the event,
sometimes the claims are not paid on account of various reasons. ‘Repudiation of Claims’ will be the focus of
the next issue of the Journal.
U. Jawaharlal

Report Card:LIFE
IRDA Journal (Vol 6 Iss 8).pmd

First Year Premium of Life Insurers for the Period Ended JUNE, 2008
Sl
Premium u/w (Rs. in Crores) No. of Policies / Schemes No. of lives covered under Group Schemes
No. Insurer
6
June, 08 Up to June, 08 Up to June, 07 June, 08 Up to June, 08 Up to June, 07 June, 08 Up to June, 08 Up to June, 07
1 Bajaj Allianz
Individual Single Premium 34.75 71.55 76.84 7662 16939 15367
Individual Non-Single Premium 299.99 735.98 648.74 187817 480898 521272
statistics - life insurance
Group Single Premium 0.14 0.51 2.15 0 0 0 227 856 1719

Group Non-Single Premium 8.54 21.20 4.12 40 120 64 324070 758734 130877
2 ING Vysya
3 Reliance Life
irda journal
4
4 SBI Life
5 Tata AIG
Aug 2008
6 HDFC Standard
05-08-2008, 23:29
7 ICICI Prudential
8 Birla Sunlife
9 Aviva
10 Kotak Mahindra Old Mutual
11 Max New York

11 Max New York

Group Non-Single Premium -2.17 10.84 2.39 80 181 116 -140500 189120 89944
12 Met Life
IRDA Journal (Vol 6 Iss 8).pmd

13 Sahara Life
7
14 Shriram Life
15 Bharti Axa Life
statistics - life insurance

16 Future Generali Life
Individual Single Premium 0.01 0.02 3 4
Individual Non-Single Premium 0.40 1.09 1445 3323
Group Single Premium 0.00 0.00 0 0 0 0
Group Non-Single Premium 0.57 1.56 5 12 4213 19208
irda journal
17 IDBI FORTIS
5
18 Canara HSBC OBC
Aug 2008
Private Total
Individual Single Premium 224.23 633.24 413.74 49514.00 152756.00 90459 0 0
Individual Non-Single Premium 2057.82 5086.95 3110.72 988849.00 2571663.00 1801574 0 0
Group Single Premium 59.47 209.97 162.56 39.00 174.00 126 368276 632532 364609
Group Non-Single Premium 506.10 865.48 243.93 267.00 875.00 536 699643 2359625 912447
05-08-2008, 23:29
19 LIC
Grand Total
Note: 1.Cumulative premium upto the month is net of cancellations which July occur during the free look period.
2. Compiled on the basis of data submitted by the Insurance companies
in the air
PRESS RELEASE
May 8, 2008
Canara HSBC Oriental Bank of Commerce Life Insurance Company insurance company promoted by Shriram Financial Services Holdings
Limited, a joint venture life insurance company promoted by Canara Pvt Ltd., India and Sanlam Limited, South Africa has been registered
Bank, Oriental Bank of Commerce, India and HSBC Insurance (Asia as a General Insurer under Section 3 of the Insurance Act, 1938 with
Pacific) Holdings Limited (INAH), Hong Kong has been registered as a the Authority. The Certificate of Registration (Forms IRDA/R3) has
Life Insurer under Section 3 of the Insurance Act, 1938 with the been issued by the Authority today. With this registration, the total
Authority. The Certificate of Registration (Forms IRDA/R3) has been number of general insurers registered with the Authority has gone up
issued by the Authority today. With this registration, the total number to 19.
of life insurers registered with the Authority has gone up to 19.
(C. R. Muralidharan)
Shriram General Insurance Company Limited, a joint venture general Member
CANCELLATION OF BROKER LICENSE

29th May, 2008 IRDA/DB-040/02
examined the request and advised the Broker to furnish the

Sub : Cancellation of Broker License No 176.
documents/information for cancellation of license.
WHEREAS, M/S. PEGASUS INSURANCE BROKERS PVT LTD., (hereinafter
WHEREAS, the Broker has now submitted the requirements including
referred to as the ‘Broker’) having its Registered Office at 24, Col.
the original license No.176 for cancellation.
Biswas Road, Kolkatta-700 019 and Corporate Office at A 405, Punit
Tower 2, Sector 11, C.B.D. Belapur, Navi Mumbai-400 614 has been NOW THEREFORE, pursuant to the request made by the Broker for
granted license by the Authority to act as a Direct Broker (General cancellation of Broker License, the Authority hereby cancels the Direct
Insurance) vide License No.176 on 12th day of June, 2003 pursuant to Broker License No. 176 granted to M/S. Pegasus Insurance Brokers Pvt
the provisions of the IRDA (Insurance Brokers) Regulations, 2002. Ltd with immediate effect. Since, by this order, M/S. Pegasus Insurance
Brokers Pvt Ltd cease to be an insurance broker, the company formed
WHEREAS, the Authority, in exercise of powers granted under
for this purpose also ceases and the change of name M/S. Pegasus
Regulation 34 of the IRDA (Insurance Brokers) Regulations, 2002,
Health & Risk Managers Pvt Ltd granted to it vide ROC fresh certificate
suspended the license of the Broker vide Order No. BRO/ORD/044/
of incorporation consequent upon change of name dated 17th April,
October-04 dated 13th October, 2004.
2008 does not entitle it to function as an entity registered with IRDA
WHEREAS, the Broker vide its letter dated 10th April, 2006 expressed for any activity related to insurance.
its decision to surrender the Broking License and whereas the Authority
(Prabodh Chander)
Executive Director
PRESS RELEASE
June 27, 2008
Aegon Religare Life Insurance Company Limited, a joint venture life Bharti Axa General Insurance Company Limited, a joint venture general
insurance company promoted by Religare Enterprises Limited, India, insurance company promoted by Bharti Ventures Limited, GIBA Holdings
Bennett Coleman & Company Limited, India and Aegon N.V., Pvt Limited, India and Societe Beaujon, a wholly owned subsidiary of
Netherlands has been registered as a Life Insurer under Section 3 of AXA S.A., France has been registered as a General Insurer under Section
the Insurance Act, 1938 with the Authority. Besides DLF Pramerica 3 of the Insurance Act, 1938 with the Authority. The Certificate of
Life Insurance Company Limited, a joint venture life insurance Registration (Forms IRDA/R3) has been issued by the Authority today.
company promoted by DLF Limited, India and Prudential International With this registration, the total number of general insurers registered
Insurance Holdings Ltd, USA has also been registered as a Life Insurer with the Authority has gone up to 20.
under Section 3 of the Insurance Act, 1938 with the Authority. The (C. R. Muralidharan)
Certificates of Registration (Forms IRDA/R3) have been issued by the Member
Authority to the two companies today. With the registration of these
two companies today, the total number of life insurers registered
with the Authority has gone up to 21.
irda journal 6 Aug 2008

vantage point
Claim Repudiation in Insurance

NEED FOR OPENNESS
‘MOST OF THE PROBLEMS RELATING TO REPUDIATION OF CLAIMS IN INSURANCE CAN BE SOLVED BY MAKING THE
CUSTOMER AWARE ABOUT THE TERMS OF COVERAGE AND EXCLUSIONS UNDER A CONTRACT’ EMPHASIZES U. JAWAHARLAL.
T
he blood-line of an insurance exclusions so that the policyholder is aware claim payment is purely contingent on the
contract is the promise to pay the of the details of coverage under the policy. specific event; and subject to several
sum assured on the happening of This factor alone would bring down the conditions, at that. Proximate cause,
the event. The policyholder pays the incidence of claim repudiation by a large partial settlement of the claim, actual
premium during the contract period to margin. value of the asset etc. are all examples of
fulfill his side of ‘consideration’ in the fond the problem areas in the settlement of
The reasons for claim repudiation would
hope that he is not put to financial loss, claims in non-life insurance. The insurers
differ a great deal from class to class. For
despite the insured asset – life included – should encourage the policyholders to read
example, in the life domain where it is
being lost or damaged. Naturally, the exhaustively and understand the terms of
mostly an assurance, the first and foremost
denial of the payment of a claim creates coverage under the policy so that the
reason for repudiation could be suppression
heartburn. Claim repudiation is, however, incidence of customer grievances is
of a material fact, especially in cases
an inherent part of insurance business reduced to a great extent. The importance
where a claim arises during the early
although the percentage of repudiated of the free look period has to be explained
period. It brings us once again to the fact
claims to total business varies largely to the policyholders so that in case of any
that lack of awareness among the
between different insurers. misunderstanding, steps could be taken to
common public is at the crux of the issue.
avoid a confrontation at a later stage.
In emerging markets, low awareness levels The distribution personnel should explain
as regards the nuances of insurance the importance of the need for complete ‘Repudiation of Claims in Insurance’ will
contracts lies at the bottom of the and factual information in the proposal be the focus of the next issue of the
problem. Not given to understand fully the form, rather than filling up the proposal Journal. We will be presenting different
contractual obligations, there is possibility form themselves. This will ensure that the aspects of this very vital and sensitive area
of a policyholder trying to enforce a claim. policyholder will get to know most of the of insurance business.
In order to avoid such a situation, the terms terms of coverage.
and conditions under the contract should
In non-life classes, the issue is more
be made very explicit and wherever
complicated as there is no assurance, and
necessary, emphasis should be laid on the
Enlightening the Customer
in the next issue...

issue focus
Lapsation of
Life Insurance Policies
SOME CAUSATIVE FACTORS
V RAJAGOPALAN ASSERTS THAT THERE IS A VERY HIGH LEVEL OF COMPETITION FOR PERSONAL SAVINGS FROM THE
VARIOUS RETAIL FINANCIAL SERVICE PROVIDERS AND THEIR PRODUCTS; AND THIS ALSO HAS AN IMPACT ON THE BUSINESS
RETENTION LEVELS OF LIFE INSURERS.
L
ife insurance and pension plans are legislation, except to the extent that “a
mainly promoted as long term policy which has acquired a surrender value
financial service products. They are shall not lapse by reason of non payment
used both as insurance products for getting of further premiums but shall be kept alive
protection and as instruments of savings to the extent of the paid up sum assured…” In the context of
and investment to help policyholders meet (Section113(2) of the Insurance Act, 1938).
a variety of life stage financial goals.
conventional life
Lapse is defined in different ways in
However, the likelihood of the policyholder insurance, it is usual
insurance literature. In the context of
achieving his goals is dependent upon his
conventional life insurance, it is usual to
to distinguish
• continuing to keep the policy in force distinguish between lapse where premium between lapse where
by paying the premiums as and when is discontinued before the policy acquires premium is
due, any value such as a paid up value or
discontinued before
• not withdrawing amounts from the policy surrender value; and lapse thereafter.
for other than the intended goals; and There can be cancellation or termination the policy acquires
• not surrendering the policy prematurely of policies from inception for reasons such any value such as a
for cash value. as the policyholder exercising the free look paid up value or
option, cancellation due to non disclosure,
This requires a lot of discipline on the part surrender value; and
cheque dishonour action etc. In the case
of the policyholder, particularly in modern
of a paid up policy, while premium may lapse thereafter.
times, with the availability of other
not be paid, the policy continues to be on
investment options, advice on them and
the books of the insurance company. A
the ever increasing demands on his
broader definition of lapse could cover
resources. This will also require continuous
surrender of policies.
engagement by the insurance companies
Unit linked policies are sold as flexible of lapse becomes less clear and any analysis
of their policyholders by way of service,
products with facilities such as part will depend upon the policy conditions, the
education, guidance and follow up.
withdrawals, option to increase or office’s practice and the purpose of the
In order to understand the impact of study. Broadly there could be three types
decrease premiums and sum insured and
lapses, it is necessary to understand the of issues, namely, i) premium persistency
premium holiday, by which the
different types of lapses. The term “lapse” i.e. where the premium is received as per
policyholder can miss a few premium
is not directly defined in the insurance the terms and conditions of the policy ii)
payments. For these policies, definition

issue focus
policy persistency i.e. where premium may such business. Normally the life insurer
not be paid but the policy has not been obtains the bulk of its profits in later years
surrendered or has not lapsed without any of the policy and the office’s profit forecast
value and therefore continues to be in the will be defeated if a higher proportion than
books of the insurance company and iii) expected take up the surrender values.
where the funds get depleted by partial Termination of Life insurance companies, as an essential
withdrawals at the discretion of the
policies at early part of management of their business,
policyholder, subject to the policy
conditions. In this paper the terms lapses,
durations results in invest considerable resources in promoting
persistency of the policies in their books
surrenders and withdrawals are used loss and wastage of by product design, training of agents and
interchangeably, depending upon the efforts for all the other intermediaries in selling products
context.
participants in the appropriate to the customer’s needs and
If a policy lapses, the policyholder loses deal; namely, the in providing after sales service, business
on his investment, particularly in the early practices and other initiatives. For regular
durations when the policy has not acquired
policyholder, the premium policies, it is customary for
any value. Even at later durations, the agent and the insurance companies to send premium,
surrender value may not reflect the full insurance company. default and lapse notices to the
value of investment. Also, he runs the risk policyholders from time to time, depending
of not achieving the goals for which the on the premium status. They will also take
policy was planned. Termination of policies up revival initiatives to persuade
at early durations results in loss and policyholders whose policies are in a lapsed
wastage of efforts for all the participants condition. In addition to using the
in the deal; namely, the policyholder, the traditional channels and methods for
agent and the insurance company. Life communication and delivery of service to
insurance companies have the need to get if no surrender value is paid. Also policyholders; increasing use is made of
their experience right in this area which is persistently high lapses and surrenders will information technology to create many
vital to their financial performance, affect the growth of the company’s more touch points to provide information,
growth and reputation. Life insurance portfolio of business and its reputation in respond to queries, resolve problems, send
agents have a significant stake in their the market. reminders and to facilitate service
policyholders continuing to pay the It is to be expected that there will be some transactions.
premiums for their future income by way lapses, surrenders and other withdrawals Also, life insurance companies collect data
of renewal commission. An insurance over a period in a portfolio of policies. In of all withdrawals and analyze their
agent, with a view to conserve the business conventional policies it was convenient to experience on regular basis to monitor
procured through him, is expected to make assume that withdrawal benefits would be performance, control the sales outlets,
every attempt to ensure remittance of less than the value of the policy and in the carry out profitability analysis and for
premiums by the policyholders within the old ways of pricing, assumptions on these assumptions to be used in product pricing
stipulated time, by giving notice to the could be ignored. Modern pricing methods and reserving. There is also the regulatory
policyholder orally and in writing. This is anticipate certain level of lapses, push to monitor lapses and take action,
as per the code of conduct prescribed for surrenders etc. in fixing the premium rates wherever necessary.
insurance agents in the IRDA Regulations. and marketing terms. As such, the insurer
will make assumptions on lapse rates; and
Profitability and growth rates at which policies will be surrendered
Lapse investigations
A life insurer is vulnerable to losses if a Life insurance companies are required to
etc., thereby taking into account the losses
significantly large proportion of policies submit to the IRDA lapse data, as part of
and profits arising from such transactions.
lapse in the early years before the initial the annual returns. The number of policies
If higher lapses occur in the early years
expenses and commissions can be which had lapsed and the lapse ratios in
when initial expenses and commissions
recovered. A loss will be made when a respect of non linked business for different
have not been fully recovered, the office
policy terminates at these durations even companies were published in the IRDA
will make more than expected losses on

issue focus
Annual Report for 2006 – 07. For 2006 – 07, have a clear impact on the people investing Customer specific features
the lapse ratios, calculated as a ratio of in and maintaining their life insurance Past investigations show differences in the
number policies lapsed and forfeited policies. Government policies with regard experience of early lapses due to one or
during the year to the mean of in force to taxation and fiscal incentives for life more of the following factors. An
policies during the year, varied from 4 % insurance premiums and benefits individual’s decision to buy life insurance
to 57 %. Out of 15 companies for which significantly influence people taking life and maintain it by payment of premiums
the ratios were reported, 3 had lapse ratios insurance policies and maintaining is influenced by a number of personal
less than 10%, 4 had lapse ratios premium payments. factors such as education level, socio
between11% to 20%, 5 had lapse ratios economic background, age, gender, marital
between 21% to 30 % and 3 had lapse ratios status etc. besides his ability to save.
Alternative investment options
above 30%.
Economic growth in the last two decades Studies on lapses in the past have shown
However, lapses reported as above had has opened up many other investment significant differences in experience
different underlying definitions taking into avenues and options such as mutual funds, between business coming from rural and
account the period allowed by each direct equity, property etc. for the average urban socio economic backgrounds. It is
company to pay premium after the due person and for the affluent sections of possible that to some extent these
date, which varied from 15 days to 60 days. society. This would have considerable differences are attributable to lack of
Also for greater insight, companies would impact on how an individual used to look communication, access to service etc. in
analyze lapses in relation to the new at savings and investment which were rural areas. Within the rural market,
business written during a given period, year mainly through bank deposits, post office different products may be sold to different
wise and according to the duration for schemes, PF, PPF and conventional life market segments and it will be important
which premiums have been paid. Further insurance. Tax concessions are also to know whether the lapse experience in
analysis will be carried out by other available for many of these savings and the rural market is different for each of
categories such as type of plan, sales investment vehicles. Thus there is very high these products compared to the urban
channel, customer profile etc. Recently, level of competition for personal savings market and the reasons for the same. In
the IRDA has undertaken a study of the from the various retail financial service particular, rural products which have been
lapse experience of life insurance providers and their products. specifically designed to meet the
companies and it is expected that useful regulatory targets for rural business will
information will be made available on experience different lapse ratios.
recent experience.
Data shows that lower value policies – low
In general, lapses will fluctuate from year sum assured and / or low installment
to year due to many influences. The premium have higher lapse ratios. While a
problem arises due to many factors some For greater insight, small proportion of such lapses could be
of which are external and therefore beyond due to malpractices, policies purchased by
companies would
the control of the insurance companies people with limited resources or from low
such as macro economic factors, changes analyze lapses in income groups are more prone to lapses.
in tax laws, availability and emergence of relation to the new Financial difficulties of the policyholder
alternate investment options and customer business written play a significant role in policy lapsation.
specific features. Some others are well Potential for higher lapses from these
within the control and influence of the
during a given segments indicates the need to better
insurance companies such as product period, year wise and understand the needs of such segments and
design and choices, marketing and according to the serve them with appropriate products and
distribution strategies, incentive duration for which services, rather than neglecting them in
framework, supervision and control. the sale of life insurance products.
premiums have been
Lapse ratios tend to be higher for
Causes of lapses paid.
policyholders in younger age groups –
Macro-economic factors:
presumably due to smaller and more
Employment, income and inflation levels,
uncertain income levels, greater job
and their changes from time to time will

issue focus
mobility and lack of appreciation of banks, other corporate agents, direct

concepts like risk cover, family protection, marketing etc. There are considerable
old age provision etc. variations in the marketing strategies
adopted in the sales through these
Although the proportion of women
channels, products sold and the market
policyholders is small in this country, the
segments covered. Accordingly there will
lapse rate in the case of women Lapses in the early be variations in the lapse experience of
policyholders is lower than that of male
stages of the policy the business transacted through these
policyholders. A part of this may be
attributable to the stricter criteria such as after the channels which need to be investigated
separately.
followed for issuing policies to women. first premium, first
However, it is more likely that majority of year or second Unpredictability of future
women policyholders are from the better
off and more educated sections of society,
year, raise experience
resulting in these policyholders deciding questions about It is still early days for all the new life
insurance companies and as a result of the
to pay the premiums and the keep their the sales process.
fast growth, bulk of the experience would
policies in force.
relate to early durations of policies. Except
for the Life Insurance Corporation of India,
Product design and choices it will be many years before credible data
Insurance companies have a variety of on surrenders, paid up policies and part
insurance plans and customers buy withdrawals will be available. Even for the
different plans for different purposes. It Life Insurance Corporation of India, linked
is reasonable to assume that the business is new to their portfolio and the
withdrawal experience will be different for longer term experience will be known only
different plans. products conform to the medium and long
in the future.
term investment characteristics of
For example, pension plans will have Besides, compared to the days when there
insurance products. Also, unit linked
better persistency compared to other plans was only one life insurance company;
policies will have to be for a minimum
of insurance, as these may have been market dynamics are now different with
policy term of five years and no surrender
effected as long term policies with the intense competition both within the life
value will be payable before completion
objective of building up a corpus to meet insurance industry and from other savings
of three policy years.
retirement income needs. Lapse and investment vehicles. In particular,
experience may differ between types of Past studies show that the choices
there are issues specific to unit linked
plans depending upon factors such as the exercised by the customer such as
insurance business, which is vulnerable to
needs which are met (e.g. pure protection, frequency of premium (yearly, half yearly,
movements in stock market values - such
mortgage cover, saving), term of the policy quarterly and monthly), method of
as policyholders’ dilemma whether to
and size of premium. The experience of premium payment (deduction from salary,
continue investing in unit linked insurance
unit linked business in the last six years debit to the bank account through banker’s
or to pull out money from unit linked
has shown differentiation between single order or ECS, or by the policyholder by
insurance and put in alternative
premium products sold to high net worth cheque or cash at the counter) result in
investments. Therefore, results of lapse
customers as investment products and portfolios reflecting different experience
investigations covering a particular period
regular premium products sold to the mass according to these factors. Quarterly and
may be of limited use as a guide to future
market as savings products, with the monthly modes of payment tend to have
experience. These are challenges to the
former showing relatively lower higher lapse ratios.
life insurance companies and are also
persistency. opportunities to educate their
As mentioned earlier, unit linked insurance Sales Channels policyholders directly and through their
will pose challenges due to their flexible All the life insurance companies transact agents and other intermediaries - that
design, options and customer choices. The significant volumes of business through insurance plans are long term savings and
IRDA guidelines require that unit linked alternative distribution channels such as wealth generation tools and that short

issue focus
his circumstances and needs in mind. While will be specific to the life assured based
advising a prospect, the agent should be on underwriting. In order to make the
influenced solely by the needs of the customer understand what is exactly
customer and not by the amount of covered in the plan / rider together with
commission he will get after the sale. If the limitations as described above,
the policyholders are sold policies which additional efforts will have to be made
While advising a meet their needs, they are not likely to during the sales process. The training of
prospect, the agent lapse. He is also bound by the IRDA code the sales staff and agents should take into
should be influenced of conduct not to cause termination of an account the special characteristics of the
existing policy with a view to sell a new health insurance products for them to
solely by the needs of
policy. effectively communicate to the customers.
the customer and not
In many of the early lapses, it can be seen Some insurance companies have the
by the amount of that the expected role of the agent is practice of sending along with the policy
commission he will compromised. The quality of training and document, additional materials such as Key
get after the sale. motivation provided to the agents and their Features Document, FAQs etc. explaining
supervisors and the alignment of incentives the product, terms and conditions in simple
and disincentives to persistency criteria language for the customer to understand
will go a long way in bringing down early what he has purchased. Also some
lapses due to factors attributable to the insurance companies selectively call their
intermediaries. policyholders after sending the policy to
obtain feedback and also use the
In the complaints relating to mis-selling
opportunity to answer their questions, if
term volatility associated with market of unit linked policies some of the causes
any, on the policy. There still remains the
movements should not hamper progress of policyholder dissatisfaction relate to non
question, namely, how many policyholders
towards long term financial goals. disclosure or inadequate disclosure of the
really take time to read their policy
various charges and the obligation of the
document and other informative materials
policyholder to pay premiums for minimum
Early lapses and quality of provided to them by the insurance
number of years. Through a circular issued
business companies. In this area, on-going efforts
by the Life Insurance Council in 2004,
Lapses in the early stages of the policy such are required by the insurance companies,
insurance companies are required to
as after the first premium, first year or Life Insurance Council and the IRDA, to
provide benefit illustrations for all
second year, raise questions about the sales raise the level of awareness and
products, to customers directly or through
process i.e. whether the policy chosen was involvement of the customers.
the agents. The IRDA has recently
the one which met the customer’s
stipulated that, in the case of unit linked
requirements, whether the product
products, the benefit illustrations provided
features, the terms and conditions were
to the prospect / policyholder in the
properly explained to the customer and
prescribed format should be signed by the
understood by the customer, whether the
prospect / policyholder and the sales
amount of premium and / or sum assured
person of the insurance company.
were reasonable in relation to the means
of the policyholder and whether the In the case of health insurance, there are
business was genuine or put in to achieve different plans and riders covering e.g.
the target of the agent to meet the criteria critical illness, hospitalization,
for minimum business requirement or to comprehensive medical reimbursement,
fulfill the conditions for incentive schemes specific diseases like cancer, diabetes etc.
etc. These policies differ in the scope of
coverage and there are further limitations
While procuring life insurance business for
such as waiting period and exclusions some
the company, the agent is trusted by the The author is a Consultant Actuary, ICICI
of which will be general and others which
prospect to advise him suitably, keeping Prudential Life Insurance Company Ltd.

issue focus
Persistency of Business
THE FIFTH ‘P’
RAJASEKHAR MALLELA, VENKATA MADHUKAR KANAGALA, SREENIVASA RAO KAGOLANU AND PURNANANDA KUMAR DIVAKARUNI
WRITE THAT THERE IS A HUGE ROLE TO PLAY FOR ALL THE STAKEHOLDERS IN ARRESTING THE LAPSATION TRENDS IN
LIFE INSURANCE.
Introduction Regulatory and Development Authority suitable product to the prospect, it may
With the opening up of the insurance sector (IRDA) has recently asked actuaries to eventually turn out to be the one the latter
in India, the industry has been growing redefine ‘Lapsation’ and arrive at a did not need. This gap between ‘what is
rapidly on several parameters including common definition acceptable to all the need’ and ‘how product can meet it’
enhancing public investments through insurers. Perhaps this step facilitates the eventually leads to lapsation. Availability
insurance products. Competition in the Regulator and the insurance companies to of upgraded products with better features
financial market redefined strategies have meaningful data to analyze the and returns can also be a motive to lapse
within the four P’s of marketing by industry pattern; and address the causes the existing policy and go for the new one.
introducing a wider range of products; and impacts of lapsation more effectively. This could result into replacement with
attempting competitive pricing and newer products offered by the same
Product, price, producer and the service
returns; expanding distribution channels; insurer or with the products of another
levels have all influenced policyholder’s
and leveraging promotional opportunities. insurer. Further, if the original need for
decision to lapse or continue the policy.
As a result, contribution of insurance taking the policy has changed, policyholder
Insurer, as business owner, is better placed
premiums to GDP has grown to almost 5% could prefer discontinuing the policy. For
to control lapsation and thereby to improve
which was thought to be a far reach, just example, by prepayment of an outstanding
persistency. This paper first presents the
a couple of years ago. home loan, policyholder may tend to lapse
causes-and-effects of lapsation; and then
the collateral mortgaged policy.
This phenomenal growth will have a reason suggests strategies to improve persistency
to celebrate only when insurance – by reinventing the other four P’s.
companies can overcome the associated
challenges. Among others, ‘Persistency’ of Causes for lapsation
procured business is a key challenge to be
Product Considerations
met to stay profitable. It has become as
much critical as the other four P’s to the It is said that investors discipline financial
business; and therefore, this paper institutions. A policyholder whose Insurer, as business
attempts to present persistency as the fifth expectations are not met is most likely to owner, is better
‘P’. lapse the policy. Timing and trigger for this
action vary. Response from policyholders
placed to control
For an insurance company, at a broader could be the same even if the product is lapsation and
level, persistency is the percentage of not of good value to him, though the
business retained without lapsing or being thereby to improve
product itself is good. Typically, financial
surrendered. The algorithm excludes non- products like insurance policies are too persistency.
persistency parameters such as deaths and complex to understand fully for any lay
maturities. But the definition not being man at the point of sale itself. In spite of
uniform, there could be company specific best efforts by the advisor to get the most
inclusions or exclusions. Insurance

issue focus
Pricing ‘Matters’ to lapsation of existing investment getting enticed to take a policy without
Policyholders could face unexpected products. really thinking of his affordability to
changes in the ability to pay premium. For continue the policy or if the product really
example, change of employment or ill ‘Producer’ Factor is meeting his need. In such cases, policy
health may make the premiums A study by LIMRA quotes, “Public is would most likely lapse the moment
unaffordable leading to voluntary lapse. primarily interested in financial security policyholder feels the pain of paying full
If financial problems are the dominant and generally risk averse. They are not very amount of subsequent premiums.
reasons to lapse the policy, then either knowledgeable, about financial matters, Rising attrition rate of producers is a new
flexible payment options are not available products or services…” Investors almost challenge for insurers. When an advisor
on the product or they are not explored. always prefer to take advice from qualified leaves, his block of policies will become
Anther reason to lapse could be that and designated financial advisors. And, ‘house accounts’ and those policyholders
product returns may not be meeting the therefore, the quality of sales made by find it difficult to manage their insurance
expectation of policyholder. The bonus distribution channel has great influence in needs. These ‘orphaned’ policies pose
rates may no longer be attractive, or the maintaining high levels of persistency. higher risk of lapsation.
policy cash value does not accumulate at Practices like churning and rebating,
attributable to this channel also have been
the expected rate. It is also possible that Promotion & Servicing Aspects
policyholder may not be aware of the cost- debated to be potential causes for
Policyholders who had repeated unpleasant
return trade-off to set proper expectations lapsation.
experience with the services of an
of returns. For instance, majority of Unit Quality of sale refers to positive and insurance company or the advisor, most
Linked policyholders do not know that the negative aspects of producer typically, would prefer to end their
mortality and expense charges, characteristics that influence selling relationship with the company. One
administrative charges, allocation charges process. This includes knowledge level of example could be that the sales literature
and other such policy charges get deducted advisor about products, awareness about distributed during the sale process may not
periodically from available policy value. competition, attitude, behavior and provide adequate disclosures in an easy to
Similarly, if economy pushes interest rates degree of professionalism demonstrated, understand way of all the risks and costs
to be higher, products offering lower fixed ability to assess the needs of prospects and associated with the product. It may
returns become unattractive. That leads thereby facilitating them to choose a right overemphasize the returns to induce the
product. It can be seen that tied agency prospect close the sale. If the actual
business persists less than the business experience turns out to be different, the
procured by professional channels such as policyholder is disappointed not only with
corporate firms and broking firms. Quality the product but also with the producer.
of sales is expected to be high with broking They feel that loyalty is abused in such
and financial advisory firms because of the instances. Similarly, if the insurance
Quality of sales is flexibility in offering products of different companies do not upgrade their services
companies to meet specific needs of and are not competitive in using
expected to be high prospects. technology, policyholders think they are
with broking and deprived of the benefits.
Advisors inducing policyholders to
financial advisory terminate an existing policy to take a new
firms because of the one is churning. The motive could be to Effects of lapsation
get higher first year commissions, getting Lapsation affects all the key stakeholders
flexibility in offering eligibility for ongoing reward programs - the policyholder, the producer and the
products of different during new business registration or insurer - the extent of impact varies,
companies to meet meeting qualifying criterion for prestigious though.
clubs such as MDRT. Incidence of inter
specific needs of company churning could be high when an Policyholder
prospects. advisor migrates to another company. A lapsed policy ceases to provide insurance
Advisors offering some part their protection to the insured. It forfeits
commission as discount on the initial benefits under the policy and possible
premium in return for a new policy is favorable terms later in the contact. A new
rebating. There is possibility of prospect policy would cost more, considering the

issue focus
current higher age and other related We shall first discuss one such add-on in
factors. Some insurers consider previous providing continued coverage guarantee
lapses as adverse factor while underwriting and then move on to map certain product
a new proposal. The pay back, which is features that can meet unique needs of
part of the premium paid that cannot be
Persistency is an policyholders.
forfeited, will never meet the expectations evaluation factor
No Lapse Guarantee
of policyholders. Certain products do not used by rating One striking feature of an insurance
carry cash values, so they will not
compensate any value on lapsation. Unit
agencies while giving product that keeps policy from lapsing is
overall rating to the ‘grace period’. For fixed premium
linked policies yield good returns only in
products, typically a month’s time past the
the long run. If there is an early lapsation, insurance company. actual premium due date is allowed to
policyholders receive the blow, in that they
may not have received any gains, not
Probably, insurance policyholder to pay premium and keep his
recovered the front end costs and also companies bear the coverage in force. Technically, policy lapses
at the end of such grace period ceasing
deprived of the advantage of lower costs maximum brunt of protection and benefits. The available
in the long run. Unit linked policies are
lapsation. policy account value is applied to non-
priced so that the cost of insurance reduces
forfeiture options.
with increasing accumulation value. So,
lapsing of these policies prematurely Advanced products such as Universal Life,
deprives policyholder of these benefits. ULIPs, and Index linked policies do not
lapse on account of non-payment
premiums on schedule. These policies lapse
Producer
bottom line is that lapsation hits when account value is zero and hence can
Producers do not get renewal commissions
profitability. not pay policy charges. A few more grace
if the policy is lapsed. In this case, it is
period threshold rules evolved using
possible that producer may be losing client Persistency levels are key performance
combinations of loaned and unloaned
which is more disastrous than losing indicators of business functions too. Low
account values and surrender value to
commission. If policyholder is disappointed persistency suggests a review of the quality
decide timing of lapse.
at the sales process, then it is a permanent of underwriting, new business procuration
and irreparable loss to producer. Further, process, degree of producer One product innovation is No Lapse
insurers may also impose penalties due to professionalism promoted by insurer, Guarantee (NLG) Rider offered by these
lapsation, such as denying club customer service standards to name a few. products that keeps policy in force even if
membership associated facilities and fringe Persistency is an evaluation factor used by account value is zero. In its basic form,
benefits. rating agencies while giving overall rating NLG protects death benefit, for a
to the insurance company. Probably, guaranteed period, by not lapsing policy
Insurer insurance companies bear the maximum when total premium paid is more than a
Lapsation would mean loss of goodwill, brunt of lapsation. pre-defined target premium amount.
which can cost market share in the present Typically the guarantee period will be
day competitive environment. With early preset depending on issue age. The most
Strategies to Improve
lapses, insurers would not have recovered common type of NLG uses Policy Protection
Persistency
the procuration costs on the policy Account (PPA) value which is a non-real
Product Innovations cash value account. PPA value is calculated
increasing new business strain. The
producer compensation in terms of high Product reengineering is a continuous using relatively less favorable assumptions
first year commissions, bonuses and process in the laboratory of actuaries. The than those used in calculation of the actual
rewards would prove unproductive. The root causes of lapsation are captured, policy account value. Also, PPA uses fixed
cash flows get impacted creating asset- analyzed and fed back into product design values for parameters such as loads,
liability mismatch which will adversely system. Innovations evolved to address expense charges, crediting rates. The
impact returns on the participation policies lapsation can be seen in various product coverage is guaranteed to continue as long
which in turn works against insurer. More add-ons, better usability of product as either of PPA value or account value is
than assumed level of lapsation would features and even in accommodating positive. If both the forms of NLG are
impact policy reserves adversely. The flexibility to alter policy elements easily. available in a given product, then

issue focus
Figure 1: Primary and Secondary No Lapse Guarantees
Figure 2: Policy Protection Account Value
guarantee based on PPA takes effect at the higher persistency is one that builds on the payment ceases ahead of the endowment
end of defined guarantee period for basic confidence of the policyholder. Let us look period.
form. (Please refer to Figure 1 and 2 for at a few pricing solutions to improve
diagrammatic representation of how NLG persistency. As we refer to Table-1 above, we see
ensures continuity of coverage to Vanishing Premium can be quite a useful
policyholders). Vanishing premiums feature to policyholders in providing
This is a pricing design concept for fixed flexible premium payment schedules.
Pricing Solutions premium products where the policy values
Once premiums have vanished, coverage
At a broader level, insurance products are are used to pay the policy. At the request
is guaranteed without any premium
priced using four basic factors MIXP – of policyholder, premiums can vanish as
Mortality, Interest, Expenses and payment from policyholders. They can
long as the policy values are sufficient to
Persistency. A company with great cover premium costs on the policy. If the divert the monies to other types of
persistency can price its policies lower than value can pay premium till the end of investments. From insurer perspective, the
one whose lapsation is high. The converse policy term, then premiums will vanish lapsation risk is limited to only premium
is also true. A company with competitive permanently. Policyholder no longer needs paying period versus total policy term.
pricing on its products can keep the to pay scheduled premiums. In India, this
lapsation at very low levels. For example: concept is popular through ‘limited Persistency Rewards
Higher reversionary bonus for policies with payment’ products in which the premium These are rewards for keeping policy in

issue focus
Table 1: Mapping Product Features with Policyholder Needs

The ‘Need’ Product Feature Meeting The ‘Need’
Existing policy does not get good returns. Equity Linked products with non traditional guarantees such as
Market offers better returns Guaranteed Minimum Death Benefit, Guaranteed Minimum Withdrawal
Benefit. This provides benefit of market returns and at the same time
protects from market risks. Rupee Cost Averaging, Asset Reallocation,
Fund switches are a few features on ULIPs that can yield good
returns in the long run.
Cash crunch – need more distributions Policy Loans and partial withdrawals. Over Loan Protection Rider which
from policy. ensures policy does not lapse even if debt exceeds account value.
Need more cash at regular intervals Survival Benefits matching the timing of cash need
Unsure of regular cash flows Automatic Premium Loans – taking policy loan to appropriate to premium
to pay premiums due. Choose Dividends in Cash option versus accumulating in policy itself
Temporary financial hardship Premium Holiday, Temporary Vanishing Premiums

(change of employment, out of job)
Can’t afford to pay full premium Premium Reduction with protection to original death benefit for defined
(Ill health, additional family burdens, term. Conversions to another class of insurance (like term). Face Amount
no expected increase in salary, inflation) Reduction, Change of premium paying mode, Policy/Premium
paying term adjustment
Need policy for long term but can’t Limited Premium Payment Term (which is less than policy term)
pay full term (Retirement ahead;
policy term beyond retirement)
Additional death benefit Guaranteed Insurability Option

without insurability check
Need comprehensive policy to cover Family Riders, Children Riders as additional coverages
all family members to existing policy itself with favorable terms
force for a long time. For flexible premium Shock lapse that the new product establishes new
advanced products, two broad types of Shock lapse refers to high incidence of surrender charge period.
persistency rewards are prevalent. They lapsation at the end of policy’s surrender Key feature of advanced products is
are interest rate reward and mortality charge period – typically in Unit Linked unbundled pricing. This brings
charge refund. In the interest rate reward, investment products. With limited transparency in the pricing structure and
interest credit rate on accumulation value experience and data, high shock lapse rates helps policyholders and distributors to
is increased after a minimum duration such are assumed in pricing these products. understand the costs and benefits to have
as 10 policy years. The mortality charge
With a little less conservative assumption, realistic expectations on the performance
refund provides a credit to the policy
product pricing can be more appealing to of the product.
account value.
policyholders. To encourage continuation
A few other types of persistency based of policies, policyholders can be offered a Producer Management
rewards on traditional fixed premium few benefits like free portfolio Distribution channels play very important
products include a one-time increase in rebalancing, automatic fund switches etc. role in improving persistency levels.
death benefit, special dividends or at the end of surrender charge period. If Insurance companies can formulate
providing Cost of Living Adjustments, and feasible, careful internal product strategy for effective producer
Terminal Dividends. replacement can be examined in the sense management to improve persistency.

issue focus
Conducting professional education with high first year commission and Reduction of distribution costs allow
programs, revisiting compensation gradually reduced renewal commissions. companies to provide better product value
strategies, and channel optimization are The levelized structure reduces the gap to customers, thereby promoting
a few possible measures. We discuss these between first and renewal commissions. persistency. Engaging employees with
aspects in more detail below. With increasing focus on persistency, salary plus bonus based compensation can
insurers can rethink if levelized format can help reducing per sale cost. These
Professional Education
be adopted which provides incentive to employees can be involved in lead
As part of licensing process, IRDA
advisors for bestowing continued services generation leveraging existing client
prescribed minimum educational and
to policyholders. In western countries relationships and available databases, in
testing requirements to qualify as an
where this structure is implemented, the direct sales and in directing warm leads to
insurance advisor. Designated training
companies experienced great persistency advisors.
centers conduct training on the syllabus
levels. Agents who enjoy good retention
suggested. Further, in line with other
professions, continuing educational
of business reaped good benefits. This Promotional Strategies
would also address issues noted with Key promotional strategies to ensure
requirements can be introduced. For
instance, advisors dealing with advanced rebating and churning practices. persistency can include continuous
products can be asked to take up courses customer education, service delivery
With increased sale of unit linked and
from NSE’s Certification in Financial initiatives and leveraging information
flexible premium policies, Asset Based
Market. In addition to this, insurance technology to empower distribution
Commissions can also prove to be effective
companies can impart producer education channel.
in ensuring persistency. Asset Based
to improve their ability to understand Commissions are based on the total policy
competition, the product and to display value on the commission payment date. Customer education
good professional conduct. Conducting With this structure, producers are It is in the interest of the insurer to
various producer conventions, educational continuously engage in customer
motivated to advise their policyholders to
tours and sponsorships to participate in education. This also helps to spread
keep monies invested with insurance
international forums can promote quality awareness of impacts of lapsation. An
companies.
of sales. investor guide can be published on the lines
Similarly, bonus commissions, recognition
Compensation strategies of NAIC’s (National Association of Insurance
and reward programmes like entry to Agent Commissioners) Life Insurance Buyers’
It continues to be a point of debate as to
clubs, qualification to attend various Guide in the US. It has been an ongoing
which compensation structure - levelized
conventions, awarding prizes can be effort from the regulator also to improve
or heaped - is more appropriate to
designed by including minimum persistency the awareness and direct at remedial
insurance advisors. There are pros and
requirement. Special incentives for revival options.
cons to both and insurers choose the one
that best suits the interests of their of lapsed orphan policies can be provided
Customer service camps can be conducted
distribution channel. The heaped structure apart from giving producers a share of
to explain their privileges, product
provides incentive to procuring business commissions. On the other hand, charge
features, claims processing, grievance
backs may be enforced on commissions
reddressal machinery and several other
paid for certain events like withdrawals,
policy servicing aspects. Increasing
rescissions etc.
customer sophistication and product
Advisors dealing disclosures can directly assist in retention
Channel Optimization of business.
with advanced Competition has presented new entrants
Service Delivery Initiatives
products can be into distribution arena. Besides Service delivery initiatives that catch up
asked to take up independent advisors, the channel is now the imagination of the policyholders can
strengthened with the addition of
courses from NSE’s corporate agents, broker firms,
help develop brand loyalty. These can
include - policyholders availing web-
Certification in bancassurance, and even cyber marketing services for premium payment, document
Financial Market. – policy writing though company web sites. submission, receiving cell phone alerts for
Insurance companies can optimize the premium dues, payment through SMS,
distribution costs by employing channels access to company data bases through toll
suitable to their marketing strategies. free numbers and IVRS (Interactive Voice

issue focus
corporate asset retention strategies. BCUs can ease the sale process and advisors
can help policyholders to access services can be well positioned to present
according to the need and assist in products to prospects.
Distributors like high continued client relationships.
profile individual Conclusion

Channel Empowerment with Persistency indicates financial well being
agents, corporate Information Technology of the policyholder, the producer and the
agents and brokers Companies that have embraced technology insurer. It is a result of efficient
can be encouraged stay ahead in competition. Distribution management of existing business. This
channel can be a cost effective medium paper designates Persistency as the fifth
to maintain their own for promotion of services. Distributors like ‘P’ to be considered by insurance
offices to receive high profile individual agents, corporate companies in devising corporate goals and
strategies. A detailed discussion is also
service requests, agents and brokers can be encouraged
to maintain their own offices to receive presented on how the four P’s can be key
complaints and service requests, complaints and drivers in achieving healthy Persistency
suggestions from suggestions from policyholders. levels. This timely debate initiated by IRDA
on ‘Lapsation in Life Insurance’ could
policyholders. Leveraging information technology,
producer web portal can be installed possibly bring in other dimensions of
granting controlled access to policy ‘lapsation’ as well to conclude on some
information to attend to certain service more action points in the interest of the
requests. It can enable them to place and insurance industry.
Response System), online chats and e-mail track online requests for loans, revivals,
notifications about important dates and and claims etc.
customer service request responses. The authors are all life insurance domain
Financial advisory services can be a value
Consultants from CSC (India). All implicit or
In addition, companies can set up Business addition to the customer service strategy explicit views expressed in this paper are of
Conservation Units (BCU) to implement of the insurer. Product illustration software authors only and not of their employers.

issue focus
Policy Lapsation
in Life Insurnace
ROLE OF THE MIDDLE MAN
DAVID CHANDRASEKHARAN EMPHASIZES THAT THE INTERMEDIARY’S ROLE IS VERY CRUCIAL IN KEEPING THE CONTRACTS
IN LIFE INSURANCE IN FORCE. HE FURTHER WRITES THAT WHILE IT IS VERY IMPORTANT TO IDENTIFY THE PROSPECT’S
NEEDS UPFRONT, IT IS EQUALLY IMPORTANT TO RENDER EFFICIENT SERVICE THROUGHOUT THE CONTRACT PERIOD.
L
apsation is an insurance contract Lapsation is one subject on which no • Failure on the part of the agent in playing
gone sour and benefits nobody. It insurer likes to share information with the his role to ensure that polices sold by
is bad for the insured who loses public. Data on the subject is therefore him do not lapse.
valuable insurance protection for his not available in the public domain. But
family; the agent does not get commission; rough estimates made by reliable sources Concern for conservation not
and for the insurer, it means loss of indicate high levels of lapsation, as much reflected in effective action
premium income. If it is not really in the as 25% to 30%, in the first year itself. This A major reason why policies lapse is that
interest of any of the parties to let a policy is indeed alarming. It seems policies like the marketing and sales people do not look
lapse, why do policies lapse? those of the children face high levels of beyond the sale. Once a particular sale is
Lapsation is a major area of concern for mortality in infancy. Studies also suggest through, it is time to move on to the next
all the life insurance companies as it eats that policies which are continued beyond prospect. This mindset which is widely
into their profits and the need for two years have a much lower lapsation rate prevalent is the outcome of the way their
conservation of business is therefore and tend to remain in the books of the
understood as a priority at the highest company.
levels in the companies. This concern It is true that some policies lapse due to a
however does not percolate down to the
downturn in the fortunes of the
lower levels in the organizations
policyholders which makes it difficult for
particularly to the marketing people who
them to continue payment of premium. If it is not really
are for ever chasing new business and for in the interest
However, such policies constitute a small
whom ‘Conservation’ of business is an
unheard of phrase.
percentage of the total number of policies of any of the
that lapse every year. The major reasons
parties to let a
If companies are really serious about for lapsation are the following:
conservation of business, proactive policy lapse,
• The companies’ concern for conservation
initiatives for preventing lapsation should of business does not result in effective
why do policies
be launched and strong messages should action. lapse?
be given to the employees at all levels;
• Lapsation resulting from agency
and agents, that it is in every body’s
termination.
interest to ensure that policies sold remain
in the books of the company and do not • Misselling in different forms by the
lapse. agents and marketing personnel.

issue focus
incentive package is structured. For them is sold most often than bought, the
there is no incentive on offer to get them possibility of mis-selling taking place is
to take interest in conservation. The way high. The choice of sum assured, plan and
the incentives are designed seems to make term are all issues determined by the agent
the message abundantly clear that ensuring Agency leaving ample scope for misselling. Again
conservation of business is none of their termination, like in a situation where the prospective
business. lapsation, is a customer is not financially savvy, it is highly
unlikely that the selling that takes place
While lip service may be paid to curse of the life
conservation of business in platform would be customer need based. However,
insurance when a sale takes place with the prospect
speeches, it is really nobody’s business in
practice except perhaps for the agent who
industry and actively taking part in the buying process
can clearly see that he has taken a hit due the two are and the selection of sum assured; and the
to loss of renewal commission on account interrelated. plan and term are worked out as a result
of lapsation. We need to get the marketing of informed decisions taken by him, the
people involved in conservation of business policy is unlikely to lapse as the selling in
in a way they understand. There is a case this case would be customer need based
for rewarding marketing people in respect and the buying decision would be an
of policies which have survived the first informed decision taken by the customer
three crucial years without lapsation. Past himself. Policies sold in this manner
experience confirms that if a policy has two are interrelated. When the agency gets ethically and professionally seldom lapse.
survived for three years, it has a fair terminated the policies sold by the agent
Overselling and under selling are both
chance of not lapsing mid term. Such a become ‘Orphan policies’ without any
examples of misselling, When the customer
step would also take care of the insured’s agent to service them and such policies
have a high lapsation rate. The remedy lies realises that the premium he has to pay is
interest as the policy will qualify for paid
in the company framing clear and fair rules beyond his capacity, he feels the pinch
up value even if further premium payments
making speedy allotment of these policies and lapsation occurs sooner than later. The
are not made.
possible. Once these policies are allotted, policyholder feels cheated and the
they have a good chance of remaining in relationship between him and the agent
Payment of premium made easy
the books of the company without lapsing sours. When the policy sold is too small, it
It should be said to the credit of the new
and this is therefore an effective step in is like small change for the customer who
companies and LIC also that payment of
preventing lapsation. does not consider it worth his while to
premium today is made easy and is no
longer an ordeal. You have the local area continue the policy. Policies sold solely to
Simultaneously, steps may be taken to
and wider area networks in insurance fulfill the ‘quota’, to qualify in a
reduce agency termination. Choosing the
offices making payment of premium competition or for qualifying for MDRT etc.
right persons for appointment as agents
possible any where in the country. You also serve that limited purpose and can aptly
and nurturing them till they gain
now have new modes of payment such as, be called policies programmed to lapse.
confidence to strike out on their own will
payment of premium online, through credit Policies sold en-block under pressure to
go a long way in arresting agency
card etc. LIC continues to operate the termination and help reduce lapsation. new recruits undergoing training for lower
salary savings scheme successfully which While launching ‘revival’ campaigns, it cadre posts are in the same category and
also helps prevent lapsation. All these maybe necessary for the focus to be on face the same fate. When the pressure
measures would no doubt have improved preventing lapsation. eases off on the new recruits completing
conservation considerably. However, in the their training and moving to their new
absence of data one can only hazard a Mis-selling places of posting the policies automatically
guess. Selling the wrong policy to a prospect is lapse. We have also seen the ‘sell and run
like selling ice to an Eskimo and is the most ‘ agent who has no reservations about
Agency termination and lapsation blatant example of mis-selling. Simply put, telling half-truths and even plain lies to
Agency termination, like lapsation, is a it means selling you something you do not close the sale; and quietly disappears after
curse of the life insurance industry and the need and cannot use. Since life insurance the proposer signs the proposal on the

issue focus
ensure that policies sold by him stay on is very much a part of his duty and an agent
track and do not lapse. A good agent knows needs to take all steps to see that regular
that a sale is not the end but the beginning payment of premiums is made in respect
of a long term mutually beneficial of policies sold by him. It is also indicated
relationship (what Philip Kotler called that he should assist the policy holder in
It may be mentioned relationship marketing) between him and this regard by collecting the premium and
here that the code of his policy holder. It is clearly understood paying it in the office if required.
conduct for agents by him that his first year’s commission
also makes it almost entirely goes to meet his Conclusion
procuration costs, such as travel and It is obvious that if sale of policies is done
abundantly clear that telephone expenses, entertainment ethically and professionally by the agent
his role is not expenses, cost of purchase of small gifts and the policy is serviced properly and
confined to soliciting etc. The real income for him comes from assistance in given for payment of
and procuring renewal commission. Therefore he premium, chances are that the policy sold
recognizes the need to be in touch with would remain in the books of the company.
insurance business the policyholder to ensure that due The agent would reap the full benefits of
for his company; he premiums are paid in time. Telephone calls the sale made by getting the full renewal
has to also service are made, written communications are commission due to him. There will be other
the policies sold by sent, greetings are sent for birthdays, rewards for him in the form of
anniversaries and festivals and personal opportunities to sell further insurance to
him. visits are also made for a face to face his existing policyholders; and a flood of
interaction. All these are done to ensure referrals will come his way to help him earn
that premiums are paid regularly, servicing more commission.
needs are taken care of and opportunities
for further selling of insurance are not
missed. In short over a period of time the
dotted line and hands over the first
agent becomes like a member of the family
premium cheque, never to be seen again.
and remains a friend in need throughout
In all instances of misselling the policy-
the journey of life till the end comes.
holder sooner or later comes to know that
he had been taken for a ride and the policy It may be mentioned here that the code
lapses. of conduct for agents also makes it
abundantly clear that his role is not
Agent’s Role in Conservation and confined to soliciting and procuring
Preventing Lapsation insurance business for his company; he has
A good agent needs to keep both his eyes to also service the policies sold by him. A
wide open: one eye to look out for new special mention is also made in the code The author is a retired Executive Director of
business opportunities and the other to of conduct that conservation of business LIC of India.

issue focus
Retention of
Life Insurance Business
NEED FOR IMPROVEMENT
AMITABH VERMA OPINES THAT HIGH BUSINESS RETENTION RATIOS INDICATE THE HEALTH OF A COMPANY. HE FURTHER
ADDS THAT INSURERS SHOULD ADOPT DYNAMIC METHODS OF ENSURING THAT A CUSTOMER DOES NOT GO OUT OF
THEIR REACH.
Introduction of initial premiums. Needless to say, if the Financial Crisis of Customers: Customer has
The lapsation of life insurance policies has acquisition costs are not covered, the same bought a product which meets his
been a cause for concern worldwide for would affect the financial interest of the requirements and he is interested in
the life insurance industry. Studies have company adversely. continuing with the product. However, due
been carried out on the profile of the to unexpected financial constraints, he is
Improved persistency is not only in the
policyholder, nature of policies, modes of not able to continue paying the premium
interest of the company but also of the
payment, channels and servicing to for his policies.
policy owner and the sales force. Lapsation
understand the causes of lapsation; and
adversely impacts the policyholder due to Nature of product: The customer may lose
thereby introduce measures to achieve
loss of risk cover and more often than not interest in the product/policy leading to
better persistency.
forfeiture of the premiums remitted thus lapsation. For instance, adverse market
far. For the sales force, lapsation
Significance & Impact
translates into loss of future renewal
Persistency is synonymous with the health
commissions. From an industry
of the company. A policy may lapse if the
premium payment is not persistent. The perspective, it may hamper the growth of
financial impact of lapsation is significant business.
as it adversely affects the policyholder, the
company, the agent and the industry in Causes of Lapsation Persistency is one
Some of the probable causes of lapsation
terms of the forfeiture of premiums paid, of major deciding
cost of acquisition not fully recovered, loss are as listed below:-
factors for policy
of renewal commission and wastage of Absence of proper “Needs Analysis / Life
scarce resources. Cycle Stage Analysis” at the time of sale:
pricing amongst
Persistency is one of major deciding factors At times, this critical step of understanding other factors such
for policy pricing amongst other factors customer requirements based on customer as mortality,
profile is missed out and requirements are
such as mortality, interest earned, interest earned,
expenses etc. The same is due to the not done or are done without any
acquisition costs involved which include systematic support or structure. As a result, expenses etc.
the expenses incurred to market, sell, customers end up with a product that
underwrite and issue a life insurance doesn’t adequately meet their
policy. The initial expenses thus incurred requirement leading to loss of interest
must be amortized through the collection in continuing that product.

issue focus
conditions may negatively impact the due to unforeseen circumstances/sudden

consumer’s perception of the unit linked financial constraints, are unable to pay
policies and may lead to lapsation as a their premiums.
resultant loss of interest.
Multi / Broad based product strategy:
Focus on First Year commission payouts: Increasing the Diversifying the product mix is beneficial
First year commission payouts are premium paying and indeed critical for the health of the
significant and at times act as an incentive options as well as industry. This can provide sustainability
for financial advisors to sell products over the long term and ride through
wherein they get higher commission, consumer economic downturns.
irrespective of whether the particular awareness about Increasing Premium Payment Channels:
product suits the customer’s requirement these options, Increasing the premium paying options as
or not. A sales person having a narrow
minded approach focussed solely on the
especially in smaller well as consumer awareness about these
options, especially in smaller towns has to
first commission payout may lead to towns has to be a be a key focus area for the entire industry.
customers being sold expensive / high key focus area for
premium policies that he may not be able Increasing Customer Contactability:
to sustain at a later date.
the entire industry. Ensuring accurate customer details at the
sales stage and capturing at least one
Lack of customer contactability:
phone no. where the customer can be
Inadequate details provided by the
contacted are other key initiatives that will
customer or data capture errors leading
drive up persistency levels.
to incomplete/incorrect communication
Options available for the industry to
address/contact details (phone nos. etc)
tackle lapsation Conclusion
are also proving to be a major factor in
More robust Sales Process: While steps Given the emphasis on retention of
increasing lapsation. As a result, quite
have been taken in terms of making sales business, insurers can follow some of the
often the customer does not receive the
processes transparent by way of benefit local as well as international industry’s best
communication regarding their renewal
illustration, we need to lay greater focus sales and service practices which include
notices.
on incorporating “Financial Need Analysis setting up of a focus group within the
Lack of premium payment channels: As the / Life Cycle Stage Analysis” as part of sales operations team to improve the overall
industry expands and moves towards the process. A product sold on the basis of need persistency rate / reduce lapsation rates.
interiors and more remote locations of our analysis will ensure that the product meets Multiple modes of premium payment can
country, the choice of premium payment the customer’s requirements thereby be made available to the customers.
options/modes of payment get limited. sustaining interest levels in the policy. Companies can regularly despatch
This poses a challenge for the customers premium intimation notices a month
Focus on Financial Underwriting / Product
at such locations from a premium payment before premium due date and follow this
Size (SA / Premium): Customer’s financial
standpoint, especially if the provider does up with a listing to all sales personnel for
capabilities, both current as well as
not have a physical presence in such areas. their follow-up. Reminders can also be sent
projected for future must be factored in
through e-mails / SMS to policyholders/
Orphan Policy / Servicing Issues: In some before deciding on an optimum policy/
agents wherever such information is
cases the policyholder’s Agent/sourcing product size for the customer.
available. Post the premium payment due
channel may no longer be associated with Commission Structure for financial
dates, reminder notices can also be sent
the company leading to poor servicing advisors: The structure should induce
at frequent intervals, besides intimating
issues and consequent lapsation. continuation of a policy by way of higher
client’s about the lapsation of their policies
Unintentional Lapsation: At times the commission payouts as the policy as it occurs. Additonally, through in-house
policyholders may simply forget to remit progresses. contact centre, welcome calling and
the renewal premium. They may have a Flexible Products / Product Switch / reminder calling can also be resorted to.
change of address which may not have Premium Holidays / Reduced Coverage:
been intimated to insurance company due These could be some of the measures that
to which the reminder / renewal notices may be offered to customers who have the
The author is Chief Operating Officer, Birla
do not reach them. intent of continuing with their policy but Sun Life Insurance Company Limited.

issue focus
Business Retention
in Life Insurance
MARKETING PRIORITY
H.O. SONIG MENTIONS THAT RATHER THAN CHASING FRESH PROSPECTS, INSURERS SHOULD CONCENTRATE ON LONG-
TERM RETENTION OF THE EXISTING POLICYHOLDERS, WHICH IS CERTAIN TO LEAD TO REDUCTION OF EXPENSES AS
WELL AS GROWING REPUTATION.
OLD IS GOLD” they say; and it is also • Lack of proper awareness programs for • Non-affordability to pay premiums i.e.
“ more beneficial. So preserve it and

save it. We can aptly apply it to insurance
policy too, which, more often than not,
agents and policy holders.
• Over emphasis on new business credit
to agents and offices.
Over-Selling.
• Higher commission rates of new business
for agents.
falls a prey to neglect and consequently • Lack of motivation and recognition for • Lack of care for orphan policies where
lapses, causing loss to all concerned. With retention of insurance policy. the original agent stands terminated.
the opening up of the insurance sector, the • Inadequate commission rates of lapsed
• Over attention on new business
insurance industry has progressed by leaps policies on revival.
competitions and incentives.
and bounds. Be it innovative products or
• Changing expectations and aspirations of • Lack of credit to serving offices for
addition of lacs of agents, market has
the policy holders. better retention ratios.
expanded remarkably. Growing at the rate
• Ignorance of the policy holders about the
of about 15% every year, the market
nature of benefits of the policy.
potential is tremendous. Owing to
• Lukewarm interest of the agents in old
unprecedented boom in the sector,
policies.
competition is the buzzword of the day.
However, not much attention has been paid • Termination of the agent who sold the
The care for lapsed policy.
by the insurance companies and agents to
keep the business in force by preventing it policy with efforts to • Premium notices not being received by
from lapsing. Retention of policies is a revive it creates a the policy holders.
big challenge. Since business prospects are • Non-receipt of policy document in some
feeling of loyalty in cases.
bright, procuring more and more business
attracts everyone but retaining it is a major
the minds of the
Lapsation not only hits the company with
issue. In fact, a policy with a longer policy holders. It also financial loss because procurement of new
retention success is a source of company’s contributes towards a business is always more expensive while
revenue and publicity. It builds image
through a word of mouth at no extra cost
sense of serving the existing policy is not so; it also
adversely affects the image of the
because a satisfied customer always belongingness. company. The care for lapsed policy with
remains a source of business at all times. efforts to revive it creates a feeling of
Let us examine why policies generally loyalty in the minds of the policy holders.
lapse. Some of the reasons may be as It also contributes towards a sense of
follows: belongingness. Ultimately this leads to

issue focus
growth of new business and promotion of important factor in controlling the lapsing Such campaigns, if launched earnestly and
goodwill. Insurance industry is always good of policies. All concerned are worried methodically, can yield better results.
faith based. This begets the policy holders’ about the cost part of the insurance
Nowadays, preference of policy holders to
positive response which they share with company because of loss of income on
purchase ULIPs is gaining momentum.
others. This spreads among their friends, account of lapsed policies. Solvency ratio
Therefore, if some policies have not been
kith and kin. of the insurers is also adversely affected,
sold keeping in view the needs of the
if lapsation trend of the polices is high. It
A life insurance lapsed policy, as said insured, these might lapse. For some policy
is a growing concern for insurance
earlier, is not only an adverse form of holders tax saving may be an incentive
companies also. IRDA should, therefore,
publicity but also results in negative while for others investments may be an
help the market with awareness
consequences to all – the insured, the alternative choice. In any case, the
programmes by advertising about the steps
insurer and the agent. All stand to lose. interest of policy holders should always be
to be taken in this regard by agents,
One reason could be lack of interest by kept in view. The agent should offer
insurance companies and insured. Radio/
the agents while the other could be the products appropriate to the aspirations and
TV jingles along with print media will work expectations of the customer so that he
ignorance of the policy holders. If the
well, as done in the past. Also insurance continues to pay for them. To facilitate
motive of selling insurance is not properly
company can run a programme on these policy running, insurers have to refrain
explained at the time of signing the
lines to increase the awareness levels of from promising unrealistic returns so that
proposal papers, it may lead to
the policy holders. For example: LIC has public is not swayed by the pamphlets/
discontinuance of the policy. Human life
been celebrating “Insurance Week” in the literature distributed, guaranteeing
value should be a basic factor for the
first week of September every year when unrealistic benefits, as many of them may
consideration of insurance by the
campaigns to revive lapsed policies are also not be sustainable. In fact, insurance
customers. If this is properly explained,
launched but follow up steps are not companies should bring to the notice of
the insurance contract will continue.
adequate. Consequently it is taken as a the public the salient features and factors
Unfortunately some of the insurance
ritual and the desired results are not felt. of products like ULIPs which must be
agents sell it as an instrument of
investment and saving only. Naturally, assessed by the policyholders while taking
therefore, comparisons are made by ULIP insurance products.
policyholders with other financial Other aspects like risk factor, important
instruments, like Bank FDs, Mutual Funds, features, investments options,
Capital Market gains, etc. In this process, transparency and the flexibility of the
it sometimes loses the race. Consequently products, comparison of different ULIP
policy holders stop paying for the policy;
For some policy products of different companies, should
and the policy lapses. also be properly explained at the time of
holders tax saving signing the proposal. If we look at the
Agents’ role in preventing a policy from
lapsing is very important. The policy is
may be an incentive lapsation trends of different companies,
not revived as some agents give preference while for others the data may be painful as it may reflect
lacs of lapsed policies with crores of rupees
to new policies as the commission rates in investments may be of sum assured. Policies not taken
new policies are higher. But, for a
policyholder a lapsed policy means a lot
an alternative choice. according to the financial capacity of the
of hassles. He has to undergo sometimes In any case, the policy holder may not continue as he will
find it difficult to pay for it. In the case of
a medical check-up as per the terms of interest of policy
the policy. The insurer may impose an lapsed policies, some policy holders are
holders should trading them by assigning their rights in
extra premium, change the original terms
or even decline to revive the policy, as
always be kept in the favor of interested parties. It,
revival is a new contract. If any material view. therefore, needs attention of IRDA to
fact is suppressed, the insurer may not examine whether it is in the interest of
entertain a claim after insured’s death, if the policyholder.
investigations reveal the suppression of the Commission rates of lapsed policies on
facts in the health, habits and lifestyle. revival are another factor which should
Consumer awareness is, therefore, a very engage the attention of IRDA to make

issue focus
examine the steps which may help in outsourcing job to revive lapsed policies
retaining the business in this sector. to private establishments with the help of
According to my experience of insurance insurance agents, if this is approved by
market, the direct touch of the agents with IRDA. These managers can have a dialogue
It is suggested that the insured is one predominant factor with the agents, customers and the
insurance which largely contributes to the prevention insurance company to revive the policy.
of lapsation. Sale of right products keeping Though there is an in-house arrangement
companies may in view the need of rural market is another with every company to have its own team
consider appointing factor to retain the loyalty of these policy to follow up with the customer, yet the
retention managers holders. In rural areas, the mode of the success ratio is not qualitatively up to the
policy is also important. Generally there mark. Online policy servicing is also a good
or outsourcing job
are two major crops in a year. Half yearly self servicing option to pay premium. It
to revive lapsed mode of premium payment is, therefore, should be sufficiently publicized so that
policies to private preferred. It has often been observed that policyholders can perform policy
establishments with policies with quarterly mode tend to lapse. transactions online. Agents must be kept
For those who can afford it, yearly mode informed, as they are always of great help
the help of is the best. in such matters.
insurance agents, There is also need for understanding the I would like to conclude by saying that a
rural customer profile, his needs and policy in force is not only a perennial
aspirations. For example the health source of income to insurance companies;
insurance or pension needs of rural it also provides good publicity to all
changes in the legal provisions. customers are different from their urban concerned. It also provides for commission
Remuneration in case of orphan policies is counterparts. The distribution system of to agents and better returns to the policy
dealt with in detail in section 40 (2A) of such products will therefore be different. holders. The insurance sector has entered
the insurance act 1938. An insurer can give Again the need of policy for rural rich will into a very critical but conducive phase
a notice in writing to the insurance agent be different. The vast market size and when it is desirable to pursue not just the
who sold the policy, if such agent continues rapid economic growth will certainly help new business growth but also to ensure its
to be an agent of the insurer, giving him all the insurance companies to tap this quality and retention. Some of the
an opportunity of reviving it within a time potential to their advantage. Selling the companies have grown so fast that it is
specified in the notice, being not less than right type of products in these areas will difficult for them to retain their old
one month from the date of receipt of the help in creating a better image. Micro policies. It is, therefore, strongly
notice. If the agent fails to revive the insurance products may help in this recommended that they must introspect
policy, the insurer may then pay to another respect, as these are targeted at low and look at their lapse-ratio for preventive
agent an amount not exceeding half of the income group people in the unorganized measures, keeping in view that it is
commission at which the original agent sector. conservation of business with higher
would have got, if the policy had not retention of policies which is the summum
While there is no consolidated data of
lapsed. Insurance company should make bonum of the insurance industry. Timely
lapsed policies available, it is estimated
use of the provision detailed in the above steps in this direction will pave the way
that about 25% to 40% new policies lapse.
section. Detailed discussions can be held for success to all.
This may vary from company to company.
in insurance council meetings also by all
This is a huge loss to the insurance industry,
insurance companies.
costing crores of rupees annually. To meet
Policies in rural areas are more vulnerable the challenge, IRDA should examine to
to getting lapsed. This is quite disturbing change the agency commission structure.
because the recent trends indicate that the As said earlier, commission in new policies
business growth from the rural markets is higher which attracts agents to go for
may outpace the growth from urban new policies rather than taking pains to
markets. It is estimated that more than keep in force the old policy. It is suggested
50% business contribution might come from that insurance companies may consider The author is ex-Member (Life), Insurance
the rural areas. We have therefore to appointing retention managers or Regulatory & Development Authority.

issue focus
Conservation of
Life Insurance Business
ROLE OF THE PARTIES
‘ALTHOUGH A LAPSE OF POLICY COMMITMENTS LEADS TO A DISADVANTAGE FOR BOTH THE PARTIES, THERE IS HOPE IN
THE FORM OF REVIVALS’ SAYS DR. G. GOPALAKRISHNA. HE GOES ON TO EXPLAIN SOME OF THE PRACTICES IN VOGUE
THAT CAN RESURRECT A DEAD CONTRACT.
Premium and the Contractual indulgence shown by the insurer, but days Lapse and Revival – Contractual
Obligation of grace are allowed under the policy Implications
In terms of the policy conditions, the conditions. In the event of the death of The terms and conditions of the policy
obligation of the insurer to pay the Sum the life assured during the days of grace stipulate, where the premium is not paid
Assured as stated therein is subject to the and before payment of the premium, the within the days of grace, the policy lapses
premium being paid on the due dates. non-payment of premium cannot be a but may be revived during the life time of
Thus, the premium is the consideration for ground for avoiding the policy. In view of the life assured. A policy that has lapsed is
which the insurer undertakes to discharge this, though there is a default on the part thus not irretrievably dead but can be
the liability arising under the contract. It of the policyholder to pay the premium revived. Revival is a valuable contractual
is the price for which the insurer during the days of grace, the claim would right and the insurer has no arbitrary or
undertakes his liabilities under the be paid in full and the premium for the discretionary right to refuse
contract. In life insurance, the payment current year is deducted from the claim reinstatement, if the conditions laid down
of the premium is a condition precedent amount. have been complied with. An application
to attach liability on the insurer. for revival of a lapsed policy is an exercise
of the existing contractual right and is
Days of Grace different from an application for an
A life insurance policy is a long-term altogether new policy.
contract and the consideration for the
contract viz., the premium is collected at A revival brings into being a fresh contract
It is open for the (novatio) regarding which the insurer is
convenient, agreed periodicity called the
mode of payment of premium. The insurer, depending on entitled to impose fresh terms and
policyholder is given a grace period of 30 the circumstances of conditions. It is open for the insurer,
days from the due date to make the depending on the circumstances of the
payment; and thereafter up to six months
the case, to decline case, to decline revival of a policy or to
the premium can be paid with the due revival of a policy or offer revival subject to such fresh terms
and conditions as are deemed necessary.
interest. Thus, a payment within the days to offer revival
of grace is deemed to be a payment on As the provision for revival is one of the
the due date. The legal aspect governing subject to such fresh
terms and conditions of the policy, a fresh
the days of grace is that, as a general rule, terms and conditions policy is not required to be issued, but the
where subsequent premiums are payable
as are deemed revival may impose certain obligations on
under the policy, the insurer allows a the insured by virtue of the statements
certain number of days as grace for necessary. made by them at the time of revival and a
payment of each premium. This is not an policy can be avoided for suppression of

issue focus
material facts at the time of revival. policyholders and many times the
However, whether the revival of a lapsed policyholders make the premiums they
policy constitutes a new contract or not have to pay an essential part of their family
for other purposes, it is clear from the
Sending premium budgets. Life insurance instead of being a
operative part of Section 45 of the notices is not a luxury for a few will become a necessity
Insurance Act, 1938 that the period of 2 for many. Non-payment of even one
legal obligation installment of premium may lead to
years for the purpose of that section has
to be calculated from the date on which under the undesirable consequences. A larger
the policy was effected. contract and non- payment may have to be made later
including further installments along with
By the end of six months the policy lapses receipt of the interest. The policy itself may lapse which
and can be revived only after satisfactory
evidence of good health submitted and
notice will be no will result in the withdrawal of risk cover
excuse for non- by the insurance company defeating the
arrears of premium are paid with interest.
very purpose for which the policy is
As such, follow up of premium collection payment of purchased by the policyholder. Sending
and follow up of unpaid premium becomes
a very important activity for a life
premium in time. Advance Premium Notices therefore has
become an essential part of the services
insurance office with a view to retain the
rendered by the insurance company to the
business already in books.
policyholders.
A lapse causes loss to both the recovered in successive years when Revivals
parties in a life insurance renewal premiums are received. A policy lapses if premium, which has
contract Therefore, in the event of discontinuance fallen due, is not paid within days of grace.
If a policy lapses it results in loss to both of the policy it would not be possible for If, however, a default in payment of
the insured and the insurer and benefits the insurer to recoup the excess expenses premium occurs after premiums have been
neither. The insured loses the valuable incurred. Consequently such a policy paid for at least three years, the policy
protection that the life insurance policy entails a loss to the insurer. Because of becomes automatically paid up for a
ensures. It signifies a reversal of the this reason, every effort is made by the reduced amount. It is primarily the
decision to arrange for the insurance cover life office to reduce the incidence of lapse responsibility of the policyholder to see
and therefore, exposes the policyholder to and take several measures to conserve the that the premiums are paid on the due
possible adverse circumstances. It is also business from going out of books of the dates so that the policy remains in force.
a reflection on the agent’s efforts as it (the office. The insurer helps him by sending premium
lapse) suggests that the policyholder had notice in advance and by reminding him if
not been fully convinced about the It is the practice of insurers to send regular
he has defaulted in payment. The policy
usefulness of the insurance plan. notice to the policyholder about the
conditions provide for revival of
premium falling due under the policy.
The insurer also loses in a different way. discontinued or lapsed policies.
Notices are not issued in respect of policies
While fixing premium rates it is assumed where the mode of payment of premium Because lapsation affects both parties
that every policy will be kept in force for is monthly. Sending premium notices is not adversely, and because lapsation is not
the full sum assured for the period it should a legal obligation under the contract and always intended by the insured to happen
remain up to the time of claim by way of non-receipt of the notice will be no excuse (lapsation may occur due to just neglect
maturity or death. A level charge is made for non-payment of premium in time. or oversight or because of temporary
in the premiums for expenses and Notices are sent only as a matter of financial difficulties), insurers make it
premiums charged are uniform for a stated courtesy to remind the policyholders. This possible for lapsed policies to be brought
term. The expenses actually incurred are however helps timely payment of back into full force by reviving them.
not uniform for each policy year but are premiums by a large number of Insurers have different schemes of revival,
substantially higher in the first year of policyholders and in turn help in with a view to help policyholders revive
insurance. Thus even though the first year’s conservation of business. This will ensure lapsed policies on easy terms and obtain
premium contributes only the uniform regular and even flow of funds enabling back the intended protection and security
amount provided in premium; the insurer the insurer to prudently invest the same for themselves afforded by the insurance
incurs much higher expenses towards and earn handsome dividends that will help cover which they so thoughtfully planned
higher commission to agents, medical fees, ensure meet their commitments. This will to possess. The different schemes for
policy stamps etc. The excess amount also ensure regularity of payment of revival offered by the LIC will illustrate
spent in the first year is expected to be premiums by a large number of some of the considerations for revival.

issue focus
For revival of polices, the following will up value (not including vested bonus) on terms, is quite low under the special revival
normally be necessary. the date of lapse. The underwriter may scheme, as arrears of premium will not be
• Arrears of outstanding premiums with agree to revive as per the original policy paid for the entire period of lapse.
interest terms or on modified terms or even decline
Under the Installment Revival Scheme,
to revive. This decision is made after
• Proof of continued good health the policyholder will not be required to
examining the risk factors at the time of
• A fee for reinstatement or revival. pay the full arrears but only six monthly
revival, which may have changed since the
premiums, two quarterly premiums, one
Some insurers do not allow revival, if the original policy was taken.
half yearly premium or half of the yearly
policy has remained in lapsed condition for Subject to the underwriter deciding that premium. The balance of the arrears will
more than five years. This is because of the revival can be done, various be spread over the remaining due dates in
the possibility that the arrears of premiums alternatives are offered by life insurers, the policy year current on the date of
on such a policy would be too heavy and some of which are as follows. revival, and two full policy years
that it would be better to take out a fresh thereafter. A policy revived under this
policy. The Special Revival Scheme is allowed if
scheme will be endorsed to the effect that
• the policy had not acquired any Surrender the assured will have to pay the enhanced
The requirement of proof of good health
Value on the date of lapse premium for a fixed period. This scheme
varies according to the duration of lapse
and also according to the Sum Assured. Up • the period expired after lapse is not less is made available if the policy cannot be
to six months from the date of lapse, no than six months and not more than three revived under the special revival scheme,
proof is necessary. Only the arrears of years where the premium is outstanding for more
premium will do. This period of six months • the policy had not been revived under than one year and no loan is outstanding.
is extended to twelve months in the case this scheme before. Another scheme offered is Loan-cum-
of policies, which have been in force for Revival Scheme, whereunder the arrears
On revival under this scheme, there will
at least five years. If the policy is due to required for revival are advanced out of
be a new policy with the same plan and
mature within a year, then also only arrears the surrender value of the policy as a loan
term as the original policy but with the
of premium are called for. under the policy. The policy will be revived
following changes.
Where proof of continued good health is immediately, and the loan will have to be
• The date of commencement is advanced
necessary, the nature of proof can be a repaid like any other loan under insurance
by a period equal to the duration of
simple declaration or an elaborate medical polices. If the loan available under the
lapse, but not more than two years. For
examination with special reports. The policy is more than the amount required
example: If the original policy
considerations are the same as in the case for revival, the excess may be paid to the
commenced on 1.10.1999 and had lapsed
of a fresh proposal for insurance. A revival policyholder, on request.
on 1.1.2001, on revival on 1.7.2002
is effectively a decision to underwrite a (period of lapse being 1 year and 6 If the policy is a Money Back kind of plan,
risk, the risk being equal to the original months), the new date of in which a survival payment is due, the
Sum Assured under the policy less the paid commencement will be 1.4.2001, 1 year said survival amount can be adjusted
and 6 months forward. If the revival was towards the outstanding dues for revival.
to be done on 1.4.2003 (period of lapse This is the Survival-cum-Revival Scheme.
is 2 years 3 months), the new date will
be 1.10.2001 (only two years forward), Conclusion
The underwriter and not 1.1.2002. By taking a few proactive measures and
• Premium is recalculated for the age ensuring that premiums are remitted in
may agree to time, not only does the lapsation of life
corresponding to the date of
revive as per the commencement after revival. insurance policies get arrested but it would
original policy The original policy is endorsed for changes
go a long way in furthering the larger
interests of both the parties concerned
terms or on in the date of commencement, age, viz., the life insured and the life insurer.
premium, date of last installment of
modified terms or premium, and maturity date. The
even decline to difference between the old premium and
revive. the new premium with interest thereon
will have to be paid. The policyholder will
be required to pay the endorsement fee.
The revival consideration, in monetary The author is a Retd. Sr. Officer, LIC of India.

follow through
Valuation of Assets, Liabilities

and Technical Provisions
GENERAL INSURANCE
KARPAGAM SANKARANARAYANAN ASSERTS THAT ASSET LIABILITY MANAGEMENT BEING A FUNCTION OF VITAL IMPORTANCE,
THERE MUST BE PRESET STANDARDS ACROSS THE GLOBE THAT WOULD ENSURE THAT INSURERS ARE NOT CONSTRAINED
TO FACE HURDLES IN THEIR FUNCTIONING.
V
aluation of assets and liabilities is important from the perspective of major factor in selection of method for
crucial for asset liability valuation for solvency. valuation. The purpose of valuation which
management, cash flow, may be financial reporting, consolidation,
QIS 4 is a valuable guideline for insurance
investment management and profitability Mergers & Acquisition, Initial Public Offer,
companies in estimating, managing and
of the insurance companies, as any mis- Reorganization, Leverage buy out or sale
providing capital for conducting insurance
match and incorrect valuation would may also impact the choice of the valuation
business and currently is still under
impact the balance sheet, profit and loss; method.
development and when implemented,
and in turn would lead to excess or
would be binding on insurers in European
inadequate capital. Proper management is
Union.
important for capital provisioning as under-
capitalization will jeopardize the solvency This article discusses the valuation
of the insurer; and over provisioning, the principles, guidelines and key findings of Proper management
profitability and competitiveness of the QIS4 on valuation of assets and liabilities
is important for
insurance enterprise. and technical provisions as applicable to
Non life insurance. capital provisioning
Valuation of assets and liabilities is a
complex issue and there are many methods
as under-
Valuation of Assets and Liabilities capitalization will
and techniques of valuation depending on
The market, income, and cost approaches
the purpose of valuation.
are generally accepted under fair value
jeopardize the
Valuation of Assets and liabilities is getting measurement method of valuation. Under solvency of the
attention from the insurance supervisors the market approach, prices for market insurer; and over
because of its impact on maintaining the transactions for identical or comparable
solvency of the insurance companies. In assets or liabilities are used. The income
provisioning, the
this regard, Solvency II, an EU initiative is approach uses valuation techniques to profitability and
working at designing a method for valuing discount future cash flows to a present competitiveness of
insurance company’s assets, liabilities and value amount. The cost approach is based
technical provisions such that capital on the current replacement cost such as
the insurance
requirements for the insurance companies the cost to buy or build a substitute enterprise.
could be arrived based on their risk comparable asset after adjusting for
potential. The recently released CEIOPS obsolescence. Availability and reliability of
Quantitative Impact Study 4 (QIS4) is data related to the asset or liability is a

follow through
Generally, a single or multiple valuation • Valuations can be based on accounting flow projections. Care should be taken
technique may be needed based on the figures when the difference between to identify the type of inflation to which
situation and a multiple valuation method economic value and accounting value is particular cash-flows are exposed. For
would be used to value assets, liabilities insignificant; and/or the cost of some cash-flows, the link may be to
and provisions. calculating economic value is consumer prices, but there are other
uneconomical. links such as salary inflation, which tends
QIS4 provides guidance on approach to
valuation of assets and liabilities, technical to exceed consumer price inflation.
Assumptions • The inflation used in the calculations
provisioning and range of techniques for
The QIS4 guidelines for any underlying
the best estimate valuation of technical should be the market consistent base
assumption are as follows:
provisions. underlying inflation plus the necessary
• Where no credible information is amount to reflect the specific features
QIS4 on Assets and Liabilities available, the assumption used should of the cost or cash-flows.
valuation be realistic.
The purpose of QIS4 is to specify the • Cash-flow projections should reflect IFRS & Solvency II
frameworks for valuation of assets, expected demographic, legal, medical, International Financial Reporting Standard
liabilities and technical provisions of technological, social or economic (IFRS) is the common accounting standard
insurance companies such that the developments. in Europe. It is expected that India will
required capital for maintaining solvency • Appropriate assumptions for future adopt IFRS as accounting standard by 2011.
can be assessed. QIS4 proposes principle inflation should be built into the cash- Solvency II framework accepts IFRS
based valuation method for Assets and
Liabilities.
Balance Sheet Item Recommended Valuation and
Solvency Adjustment for QIS4
The principles specified in QIS are: Intangible Assets
• The assessment should be made using Goodwill on Acquisitions; Valued at nil for solvency purposes.
an economic, market-consistent and Intangible Assets
valuation of all assets and liabilities Tangible Assets

Property, Plant & Equipment IAS 16 revaluation model as given below is
• Mark to market, mark to model, proxies accepted if valuation is recent.
and national accounting figure would be Initial valuation – At cost
the valuation techniques to be used in Subsequent Valuation –
that order. Where marking to model - cost model: cost less any depreciation and
impairment loss;
valuation technique is used it has to be
- revaluation model: fair value at date of
benchmarked, extrapolated or otherwise revaluation less any depreciation or impairment
calculated from a market input, in which In other cases using fair value at balance sheet
case characteristics of model and inputs date using economic value should be considered.
used should be specified. Inventories IAS valuation of - at the lower of cost and net
realisable value is acceptable.
• In the case of ring-fenced funds in place
Finance Leases The treatment under IAS 17, to the extent that
which separate part of the resources fair value and not the present value of the
from the rest of the business, the minimum lease payment is used, is considered
an acceptable proxy for valuation on an
calculation of the liabilities and assets economic value basis.
for each ring-fenced fund should include Investments
all cash-flows in and out of that fund. Investment Property IAS valuation basis of initially at cost; then
either fair value model or cost model is an
• For solvency purposes, the economic acceptable proxy.
value of most intangible assets is Participants in subsidiaries,
associates and joint ventures Fair value treatment as in IAS 39.
considered to be nil or negligible, since
Held to maturity Investments Amortised cost.
they very rarely have a cashable value.
Loans and Receivables
Accordingly Goodwill, brand value and
Available for sale financial assets Fair value with valuation through equity.
similar intangible assets are not valued Financial assets at fair value Fair value with valuation adjustment through profit
in calculating solvency capital. though profit or loss and loss account.

follow through
Other Assets standard as proxy for valuing many of the

Non current assets held for sale or The treatment under IFRS 5, to the extent that fair value balance sheet items. CEIOPS has identified
discontinued operations and not the carrying amount is used, is considered an items where IFRS valuation rules might be
acceptable proxy for valuation on an economic value basis
considered consistent with economic
Deferred tax assets The treatment under IAS 12 is an acceptable proxy for
valuation on an economic value basis. Participants are valuation, and where necessary,
not required to include in their solvency balance-sheet a adjustments to IFRS are proposed which
deferred tax item specifically related to the change in
value of technical provisions arising from the move from are intended to bring the IFRS treatment
Solvency I to Solvency II. However, in line with the closer to an economic valuation approach.
economic approach underpinning Solvency II, all
expected future cash-out and -in flows related to taxes In all cases where IAS valuation is accepted
applicable under the fiscal regime currently in force in
for solvency purposes but the insurers use
each country should be recognized in the solvency
balance-sheet. In particular, to the extent that a internal valuation model which is different,
deferred tax item currently appears on the accounting a suitable explanation is to be provided by
balance-sheet in relation to technical provisions, this
should be included in the QIS4 balance sheet. the insurers.
Current Tax Assets As under IAS 12 - Current tax assets are measured at the
amount expected to be recovered. Valuation of Technical Provisions
Cash & Cash equivalents Current tax assets are measured at the amount expected
Technical provisions consist of premium
to be recovered. and claims provisions; and are likely to be
Impairment IAS 36 and IAS 39 to be applied where relevant the biggest amount in balance sheet of
insurers apart from investment. Fair Value
Provisions Similar to IAS 37 where in the amount recognized is the
best estimate of the expenditure required to settle the of technical provision is imperative for
present obligation at the balance sheet date. arriving at the capital requirement and
Financial Liabilities solvency of the insurer.
Financial Liabilities at fair value Fair value with valuation adjustments The technical provisions are established
though profit or loss through profit and loss account.
with respect to all obligations towards
Other Financial liabilities and All financial liabilities should be valued at fair value in policyholders and beneficiaries of
amounts payable accordance with the guidance provided in IAS 39 with no
adjustment, where applicable, for own credit standing. insurance contracts. The calculation of
If a different valuation basis is used, full explanation technical provision should be based on
must be provided.
current exit value and should reflect the
Other Liabilities amount for which they could be transferred
Deferred Tax Liabilities As in IAS 12, Deferred tax liabilities cannot be discounted or settled.
and are measured at the tax rates expected to apply
when the liability is settled and must be reviewed at The technical provision is equal to the sum
each Balance Sheet date.Participants are not required to of a best estimate and a risk margin where
include in their solvency balance-sheet a deferred tax
item specifically related to the change in value of both are valued separately, with the
technical provisions arising from the move from Solvency exception of hedgeable (re)insurance
I to Solvency II. However, in line with the economic
approach underpinning Solvency II, all expected future
obligations. Stress is on using current and
cash-out and -in flows related to taxes applicable under credible information for calculation
the fiscal regime currently in force in each country purposes.
should be recognized in the solvency balance-sheet. In
particular, to the extent that a deferred tax item For non-life direct insurance, the amounts
currently appears on the accounting balance-sheet in
relation to technical provisions, this should be included of technical provisions should be indicated
in the QIS4 balance sheet. for each of the insurance categories
Current Tax Liabilities Unpaid tax for current and prior periods is recognised as • Accident and health – workers’
a liability. Current tax liabilities are measured at the
compensation
amount expected to be paid
Employee benefits • Accident and health – health insurance
Short term employee benefits As in IAS 19, Recognise undiscounted amount expected to • Accident and health –others not included
be paid as a liability (accrued expense), after deducting
under first two items
any amount already paid.
Post employment benefits As in IAS 19 • Motor, third-party liability
including pensions, Other Long • Motor, other classes
Term employee benefits
and Termination Benefits • Marine, Aviation and Transport

follow through
• Fire and other property damage • Simplified and compatible with current actuarial ‘best
• Third-party Liability • Proxies. practice’ and should take into account
all factors that might have a material
• Credit and Suretyship
Best Estimate impact on the expected future claims
• Legal expenses experience. Typically, this will require
The best estimate method uses the time
• Assistance the use of claims data on an occurrence/
value of money, using the relevant risk-
• Miscellaneous non-life insurance free interest rate term structure and is accident year basis or an underwriting
equal to the probability-weighted average year basis for the run-off triangles.
Proportional non-life reinsurance should be
treated as direct insurance, i.e. it should of future cash-flows. • “Goodness-of-fit” tests should be
be allocated to one of the 12 lines of applied to all statistical methods
business (LOBs) listed in the previous The principles behind Best considered. The results from this analysis
should be taken into account together
paragraph. Estimate valuation of technical
with the estimate of future trends, the
Non-proportional reinsurance shall be split provisions are:
relevance of past data (particularly the
into property, casualty and Marine, Aviation • The calculation of technical provisions inclusion of exceptional events) and
and Transport (MAT) business. is based on their current exit value. other elements of actuarial judgment in
For those Non-life LOBs which have • The calculation of technical provisions determining the best estimate
contracts similar to life insurance, shall make use of and be consistent with provisions.
participants should disclose separately the the information provided by the financial
best estimate of liabilities similar in nature markets and generally available data on Premiums provisions
to ‘standard’ applicable non life principles insurance technical risk. Premium provisions substitute current
and the best estimate of liabilities where • The technical provisions are established unearned premium provisions and
life principles need to be used. with respect to all obligations towards unexpired risk provisions. Premium
policyholders and beneficiaries of provisions relate to the coverage period
Techniques of Valuation insurance contracts. when the insurer provides the service of
There are three techniques specified for accepting and managing the risks to its
• The value of the technical provisions is
technical provisions valuation – policyholders. The calculation of the best
equal to the sum of a best estimate and
estimate of the premium provision relates
• Best Estimate a risk margin.
to all future claim payments arising from
• The calculation of best estimate should future events post the valuation date that
be based upon current and credible will be insured under the insurer’s existing
information and realistic assumptions policies that have not yet expired,
and be performed using adequate administrative expenses and to all
actuarial methods and statistical expected future premiums.
Insurers should use techniques.
Premium provision is determined on a
statistical methods • The cash-flow projection used in the
prospective basis taking into account the
calculation of the best estimate should
compatible with expected cash-in and cash-out flows and
take into account all the cash in- and
current actuarial out-flows required to settle the
time value of money. The expected cash
flows should be determined by applying
‘best practice’ and obligations over their lifetime.
appropriate methodologies and underlying
should take into • The best estimate should be calculated models and using assumptions that are
gross, without deduction of the amounts
account all factors recoverable from reinsurance contracts
deemed to be realistic for the line of
business or homogenous groups of risk.
that might have a and special purpose vehicles.
material impact on • The valuation of the best estimate for Post-claims technical provisions
the expected future claims outstanding provisions and for Post-claims technical provisions relate to
premium provisions should generally be the settlement period between claims
claims experience. carried out separately. However, if such being incurred and claims being settled.
a separate treatment is not practical, During the settlement period, the insurer
valuation could be done together. is at risk due to uncertainties regarding
• Insurers should use statistical methods the number of claims not yet reported

follow through
participant will try to adjust the historical of the SCR to be met by an undertaking
data using objective and verifiable criteria, facing such obligations.
maintaining in any case homogeneity of
For the purpose of QIS4, participants are
Where there is an different series used. If this adjustment
requested to perform their SCR
were not possible or reliable, a case by
unsure distinction case assessment is preferable to the
calculations on the basis of the standard
between hedgeable application of too heterogeneous methods
formula, when calculating the risk margin,
even if it should be possible to use the
and non-hedgeable or to inconsistent sets of data. However, if
output of an approved internal model to
it is considered that the claims handlers
cash-flows, or where consistently under or over estimate claims, perform the SCR calculation under the
market-consistent this should be reflected in the overall best future Solvency II framework.
values cannot be estimate provision. Where the risk margin calculation is based
on the standard formula, it should be
derived; the non-
Risk Margin, Reinsurance and calculated net of reinsurance. Where
hedgeable approach Hedging participants calculate the risk margin using
should be followed. The risk margin is to ensure that the value an internal model, they can either perform
of technical provisions is equivalent to the one single net calculation or two separate
amount that (re)insurance undertakings calculations.
would be expected to require to take over
The risk modules that need to be taken
and meet the (re)insurance obligations. It
into account in the cost-of-capital
(IBNR claims), the stochastic nature of is to be calculated by determining the cost
calculations are operational risk,
claim sizes and the timing of claim of providing an amount of eligible own
underwriting risk with respect to existing
payments as well as uncertainties related founds equal to the Solvency Capital
business and counterparty default risk with
to changes in the legal environment. Requirements necessary to support the
respect to ceded reinsurance. The QIS4
insurance (re)obligations over their
For short-tail claims, either the result of framework provides detail for arriving at
lifetime.
their individual valuation (case by case) this risk and however is not discussed here
or the result of sound statistical methods The (re)insurance obligations are split into as this is beyond the purview of this article.
may be assumed as reasonable proxies of “hedgeable” and “non-hedgeable”. The
their best estimate, provided it is proved valuation of the technical provisions should Other Considerations
to be a consistent method by back testing. cover both hedgeable and non-hedgeable Insurance company’s valuation differs due
(re)insurance obligations. Where there is to inherent uncertainty in estimating its
For claims with significant uncertainty, in an unsure distinction between hedgeable liabilities and assets. Discounting of cash
either timing or amount, generally long-
and non-hedgeable cash-flows, or where flows, expenses, reinsurance recovery and
tail claims; the best estimate should in
market-consistent values cannot be default risk needs special attention.
principle be valued using relevant actuarial
derived; the non-hedgeable approach
methods based on run-off triangles. To
should be followed. Discounting
guarantee that the insurer controls both
model and parameter errors, some general A cost-of-capital methodology should be Cash-flows should be discounted at the
principles are suggested: used in the determination of the risk risk-free discount rate applicable for the
margin. relevant maturity at the valuation date.
The best estimate should be assessed using These should be derived from the risk-free
at least two different methods that could Under the cost-of-capital approach, the
interest rate term structure at the
be considered reliable and relevant. risk margin is calculated by determining
valuation date. Where the financial market
Judgment should then be used to choose the cost of providing an amount of eligible
provides no data for a maturity, the
the most appropriate method. A most own funds equal to the SCR necessary to
interest rate should be interpolated or
appropriate method is a technique which support the insurance and/or reinsurance
obligations over their lifetime. In order extrapolated in a suitable fashion.
is part of best practice and which captures
the nature of the liability most adequately. to do so, participants should produce a To determine that alternative risk free
If the available data do not offer a robust projection of their insurance and/or interest rate term structure, a model which
behaviour to be integrated directly into reinsurance obligations until their is close to the model used by the European
run-off triangles and treated through extinction and then, for each year, Central Bank could be used. In Indian
generally accepted actuarial methods, the participants should determine the amount scenario this could be model used by RBI.

follow through
Expenses into consideration as well. Expenses counter party, the associated risk of default
Expenses that will have to be incurred in related to the cash flows due to future has to be calculated and appropriated/
the future to service an insurance contract premiums are excluded if the latter are provided for.
are cash flows for which a technical excluded from the evaluation of the
The counter part default assessment should
provision should be calculated. For the best estimate.
be based on an assessment of the
valuation, firms should make assumptions probability of default of the counterparty
Firms should consider their own analysis
with respect to future expenses arising and average loss resulting from such a
of expenses, future business plans and any
from commitments made on or prior to, default (loss-given-default). The
relevant market data. As an alternative to
the valuation date. assessment should also take the duration
using the analysis of their own expenses
All future administrative costs, including and future business plans, a new company of the reinsured liabilities into account.
investment management, commissions, (with anticipated cost-overruns for an Credit spreads, rating judgements,
claims expenses and an appropriate initial period) may consider the likely level information relating to the supervisory
amount of overheads should be considered. of costs that would be incurred if the solvency assessment, and the financial
Expense assumptions should include an administration of existing policies were reporting of the counterparty are some of
allowance for future cost increases. These outsourced to a third party. the sources of information that could be
should take into account the types of cost used for assessing the risk. The assessment
Whenever the present value of expected
involved. The allowance for inflation of the probability of default should take
future contract loadings is taken as a
should be consistent with the economic into account the fact that the probability
starting point, any shortfall relative to
assumptions made. For disability income increases with the time horizon of the
future expenses that will have to be
and other similar types of business, claims assessment and the average probability
incurred in the future to service an
expenses may be a significant factor. should be assessed.
insurance contract should be recognised
To the extent that future deposits or as an additional liability (and the If no reliable estimate of the loss-given-
renewal premiums are considered in the opposite). default is available, 50% of the value of
evaluation of best estimate, expenses the amounts recoverable should be used.
relating to those future deposits and Reinsurance Liabilities and If no reliable estimate of the probability
renewal premiums should usually be taken Special Purpose Vehicle (SPV)s of default is available, the probability of
The best estimate of the insurance default of the counterparty according to
liabilities of the insurers should be the default risk sub-module of the SCR
calculated gross of reinsurance contracts standard formula should be used for a time
and SPV arrangements. The value of horizon of one year.
reinsurance recoverables should be As far as recoverables are covered by a
adjusted in order to take account of collateral or a letter of credit, the
expected losses due to counterparty probability of default of the collateral or
default, whether this arises from the letter of credit occurring at the same
Expense insolvency, dispute or another reason. time as the default of the counterparty,
assumptions In certain types of reinsurance, the timing along with its loss-given-default may
replace the probability of default and the
should include an of recoveries and that of direct payments
loss-given-default of the counterparty.
might markedly diverge, and this should
allowance for be taken into account when valuing The adjustment for expected loss should
future cost reinsurance and SPV recoverables. be calculated separately for each
increases. These Recoverables should also fully take into counterparty. However if the estimates of
account cedents’ deposits. In particular,
should take into the probability of default and the loss-
if the deposit exceeds the best estimate given-default of several counterparties
account the types claim on the reinsurer, the recoverable coincide, no separate calculation is
of cost involved. is negative. necessary under the simplified approach.
Risk of counterparty default and Future premiums from existing

Margin Assessment contracts
As there is a possibility of default by The cash flows included in the best

follow through
estimate of the (re)insurance liability Simplified Method The following table specifies applicable
should only include cash flows associated A simplified method uses actuarial methods actuarial and other proxy method for
with the current insurance contracts and and statistical techniques to calculate calculating various provisions.
any existing ongoing obligation to service insurance liabilities and is appropriate in
It is possible that an insurance company
policyholders. This should not include case the risk underwritten by insurance
may use any of the above methods to value
expected future renewals that are not companies is not complex in risk and scope.
its assets, liabilities and technical provision
included within the current insurance Simplified method is advised in the case
subject to the fact that consistency is
contracts. of following scenarios:
maintained and wherever a deviation takes
• Homogenous group of risk that is not place, it should be ensured that the
Recurring premiums should be included in
complex method is appropriate and explanation be
the determination of future cash flows,
with an assessment of the future • The insured risks underwritten are stable provided.
persistency based on actual experience and and claims pay out could be predicted
To conclude, the global nature of insurance
anticipated future experience. with great certainty or future claims
business and insurance companies has
related cash flow could be projected
Where a contract includes options and created a need, wherein the regulators
with greater accuracy.
guarantees that provide rights under which across the globe are looking at convergence
• Liability valued is not material in in accounting and reporting standards.
the policyholder can obtain a further
absolute terms or relative to the overall With the emergence of IFRS as a possible
contract on favourable terms (for example,
amount of total best estimate global standard, it is expected that EU’s
renewal with restrictions on re-pricing or
further underwriting) then these options • This guidance on materiality is initiative towards Solvency II could become
or guarantees should be included in the applicable with respect to all accepted as a standard for valuation for
valuation of the insurance liability arising simplifications to determine the value Solvency Capital Requirements and
under the existing contract. Where no such of the best estimate and/or risk margin Mandatory Capital Requirements
calculation by regulators outside Europe
restrictions on re-pricing or underwriting
exist, there is no ongoing obligation to
Proxy Method also.
Proxy method can be used where there is
service policyholders. QIS4 framework provides guidance for
insufficient company-specific data of
valuing the Assets Liabilities and Technical
In particular, future premiums should be appropriate quality to apply a reliable
Provisions of the Insurance Companies,
included in the determination of future statistical actuarial method for the
considering the complexities involved in
cash flows when the payment of future determination of the best estimate or
organization, funding model, lines of
premiums by the policyholder is legally when the calculation of an economic value
business, complexity of the products sold,
enforceable or guaranteed amounts at is unjustifiable and impractical in terms
portfolio strength, and reinsurance
settlement are fixed at subscription date. of cost incurred and benefits derived.
arrangements. It provides for co-existence
of standard and internal models for
valuation. The fact it is still evolving would
Applied to Claims Premium Discounting Gross mean that it might undergo some changes
Proxy provision provision to net
but it is hoped that the underlying principle
would not change much. Insurance being
Market development patterns
a highly regulated business it is expected
Average severity/frequency that testing capital adequacy for solvency
Bornhuetter-Ferguson purpose would be a prime method of
valuation in addition to valuation
Case by case
conducted for any other purpose.
Expected loss
Simplified application of
standard statistical techniques
Premium based
The author is heading the P & C Insurance
Claims handling costs Domain Excellence Group in HCL Technologies
Limited.

SPREAD THE WORD...
The above advertisement is issued by IRDA in the Public interest.
Those wishing to publish it for spreading consumer awareness of Insurance may use this artwork for reproduction.

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36 Aug
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\ÁzuQ™ ü§ãáå
21ƒÎ ∆oÁ£ty ™ı \ÁzuQ™ ü§ãáå

- §y™Á G˘ÁzT N˛y ßÓu™N˛Á
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ÀƒÁÀs
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å ƒ | úÓƒ| EÁF|EÁ∫gyL ˚Á∫Á oyå ™Ó¡Æ ú∫ Gú¬£á N˛∫ƒÁåz N˛Á EƒÃ∫ utÆÁ ßÁ∫o Nz˛ “{¡s uåuáN˛oÁ| osÁ üÀoÏuoN˛oÁ| Nz˛
oy åyuo úu∫ƒo|å N˛y VÁz mÁ Nz˛ ÃÁs
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TÆÁ@
EÁƒ≈ÆN˛ úu∫ƒo|å osÁ Euou∫Mo N˛∫ - Ã™s|å
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“{ GZ¬åz N˛Á üßÁƒ@ ET¬z 10-20 ƒ | §Át
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™\§Ïoy Ãz Gå uƒuåÆ\åÁı N˛Áz §oÁÆÁ \Áz FÃ úu∫mÁ™ Àƒøú (NÏ˛Z Ã™Æ ™åÁz“∫) å EÁåz GXY Ào∫ N˛y “{¡s ugu¬ƒ∫y osÁ uƒuÆ
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Nz˛ ™ÜÆ üuoÀúáÁ| Gnúfi N˛y \ÁL@ uƒuåÆÁ™N E√Æƒ“ÁÆ| GnúÁt osÁ LN˛ §Ï∫Á osÁ EüßÁƒy
åz Æ“ EåÏ™uo ty “{ uN˛ \yƒå §y™ÁN˛ÁoÁ| ∆ÏÚ ßÁ∫o Nz˛ §y™ÁN˛oÁ| “{¡s Nz˛Æ∫ ümÁ¬y@
“{¡s §y™Á GnúÁtÁı N˛Áz u§åÁ ™wnÆÏ ¬Áß EÁƒ∫m
Nz˛ üÀoÏo N˛∫ı@ Æ“ LN˛ §‰gÁ úu∫ƒo|å \yƒå áy∫z-áy∫z uƒ≈ƒ Nz˛ ƒo|™Áå t∆Á
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uƒ∆z EƒÃ∫ QÁz¬Á LN˛¬ “{¡s §y™Á GnúÁtÁı ˚Á∫Á “{¡s §y™Á Nz˛ Ãßy onƒÁı N˛Áz tzQÁ å“y
N˛Áz Nz˛ ÃÁsÁ@ “{¡s §y™Á NÊ˛úuåÆÁı N˛Áz \yƒå Ã¢˛¬oÁ Nz˛ u¬L \ÁoÁ “{@
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L\ıbÁz N˛y ÃzƒÁ N˛Áz ¬zåz N˛y EåÏ™uo ütÁå N˛y t∆Á|oy “{ uƒ∆z Fuo“ÁÃ ú∫Êú∫ÁTo N˛Á∫N˛
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™\§Óo N˛∫ ÃNz˛@ FÃNz˛ ˚Á∫Á åF| úyjy Nz˛
N˛y ™Ó¡Æ ümÁ¬y@ Æ“ÁÂ oN˛ uN˛ ZÁzbz osÁ LN˛
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QÁÀs
ÆÁzSÆoÁ osÁ ü§Êáå Få üÁznÃÁ“åÁı Nz˛ u¬L ï• uN˛Ãy §y™ÁNw˛o Tuouƒuá N˛y EƒáÁ∫mÁ :
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üuoÀúáÁ|, EåÏßƒ, EÁãou∫N˛ ÆÁzSÆoÁ osÁ œÁÁzo@ N˛Áz Ã™Æ Nz˛ ÃÁs §t¬ ÃN˛oÁ “{ u\ÃN˛y
“{¡s §y™Á N˛Áz √ÆuO˛To EÁáÁ∫ ú∫ uƒÀoÁ∫ oÏ¬åÁ ™Á¬ N˛y bÁzN˛∫y Ãz §t¬y \Á
EuáN˛ÁÊ∆ §y™Á tzåz Nz˛ u¬L üÁznÃÁ“å N˛Á∫N˛Áz N˛Áz EuáN˛ÁÊ∆ ÃN˛oy “{@
√ÆƒÃÁuÆN˛ ˚Á∫Á N˛Á úu∫mÁ™ üÁ∫ÁÊußN˛ GtÁ“∫m : NÏ˛Z Ã™Æ Ãz LMÃ ∫z Nz˛ EåÏúÁo
NÊ˛úuåÆÁı ™ı “{¡s §y™Á Ã™ÀÆÁEÁzÊ osÁ u“o áÁ∫N˛Áz Nz˛ ™ÜÆ oåÁƒ Nz˛ ™ı QÏ¬z ”tÆ N˛y ∆z¡ú uYuN˛nÃÁ N˛™ “ÏF| “{
øú ™ı ÃÁ™åz EÁÆÁ@
Nz˛ ™Á™¬z ™ı ƒu∫…b \§uN˛ L™EÁ∫EÁF| osÁ LÊu\ÆÁzTÁ¿ ™ §j TÆÁ
GtÁ“∫m : §joÁ “ÏEÁ §Á\Á∫ E∆Áuão N˛Á “{ Æ“ ™Ázb∫ §y™Á Ãz E¬T “{ \“Á} YÁz∫y
ü§ÊáN˛ Nz˛ ÜÆÁå N˛Á ƒÁoÁƒ∫m MÆÁzuN˛ §y™ÁNw˛o Æ“ œÁÁzo “{ uN˛ “ÏÆz ∫zugÆÁz N{˛Ãzb õ¬zÆ∫ N˛Áz §t¬Á å“y
EÁáÁ∫ E¬T- E¬T GåN˛y √ÆÁõo uÀsuo N˛Áz EÁƒ∫m å“y ütÁå \ÁoÁ “{ åÆz oN˛uåN˛ Nz˛ gyƒygy ∫ÁFg
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uƒ Æ §‰gz ÀoÁ∫ ú∫ EåÏßƒ Nz˛ úu∫ƒo|å
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™ı ƒu∫…b ü§ÊáN˛ Nz˛ ÜÆÁå N˛Á EÁáÁ∫ E¬T-
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E¬T “ÁzoÁ “{ osÁ uƒ∆z oÁ ßy §“Ïo “t oN˛
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N˛y LzÃy ÆÏƒÁ osÁ √ÆÁõo §Á\Á∫ Ãz EúzqÁ N˛y u\ÃN˛Á üßÁƒ GnúÁt ü§Êáå ú∫ ßy ú‰goÁ “{ üßÁƒ úgoÁ “{ osÁ T¿Á“N˛ Ãz Ã©üz m ú∫
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ÀƒÁÀs
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tzoy “{ \Áz T¿Á“N˛ Ãz ™ttTÁ∫ üN˛Á∫ N˛Á • ZÁzbz tÁƒÁı N˛y EuáN˛oÁ : ™zugN˛¬ tÁƒÁ \yƒå §y™Á ¬zQå N˛Áz NÏ˛Z N˛Á∫N˛ \Áz eyN˛
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• N˛F| T¿Á“N˛ÁzÊ N˛y Æ“ EƒáÁ∫mÁ N˛y MÆÁ ™“nƒúÓm| “Áz \ÁoÁ “{ uN˛ §y™ÁÊN˛N˛ LN˛ EåÏßƒÁı Nz˛ u¬L “{ ™wnÆÏ t∫ Nz˛ƒ¬ LN˛ tÁƒz
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“{ uN˛ §y™ÁNw˛o \§ LN˛ úÁ¬Ãy ¬zoÁ “{ oÁz Nz˛ EåÏ™Áå EsƒÁ EåÏ™Áå Ãz ú∫z Nz˛ tÁƒÁı \§ ™zugN˛¬ √Æƒ“Á∫ tÁƒz Nz˛ u¬L EuáN˛
§y™ÁNw˛o N˛y VbåÁ Vubo “ÁzTy Æ“ FÃu¬L Nz˛ u¬L uüu™Æ™ ™ı §t¬Áƒ Nz˛ u¬L N˛∫ı@ ™“nƒúÓm| EåÏßƒ §å \ÁoÁ “{@ u\Ã “t
“{ uN˛ üuoúÓoy| N˛Á EÁáÁ∫ ™zugN˛¬ QYÁż tÁƒÁı N˛Á Ã™Æ Ãz ßÏToÁå å “Áz úÁåÁ T¿Á“N˛Áı oN˛ gÁbÁ N˛Áz LN˛fi uN˛ÆÁ \ÁoÁ “{ osÁ
N˛Á “ÁzåÁ “{ å N˛y VbåÁ N˛Á å “ÁzåÁ@ LN˛ N˛y ÃÊoÏu…b ™ı N˛F| §Á∫ ÃÁ™åz EÁoÁ “{, §Ï∫y FÃNz˛ uƒ∆¬zZm N˛y q™oÁ EuáN˛ oÆy
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ı ™ı ümÁ¬y
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N˛Á ƒ“å §y™Á ˚Á∫Á uN˛ÆÁ \Á ∫“Á “{ ƒ“ EXZy tÁƒÁ ÃzƒÁ EÁ™ oÁ{∫ Ãz §‰gy üuoÀúáÁ| \Áå \Áåz N˛Á ™ÏÒÁ “{@
LzÃÁ å“y N˛ÁzTı Æut Eã“ı Eúåz úu∫ƒÁ∫ N˛Á u§ãtÏ “{@
ßÁ∫o N˛Á T¿Á“N˛ Ãz u™fioÁ ƒÁ¬z GnúÁt
• uN˛Ãy \ÁzuQ™N˛Á∫ N˛y ¬ÁTo Nz˛ \ÁåN˛Á∫y YÁu“L @
™ı N˛™y Nz˛ N˛Á∫m tÁƒÁı ú∫ üßÁƒ : §y™Á Nz˛ Ãßy üN˛Á∫Áı N˛y o∫“, Æ“ EÁƒ≈ÆN˛
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GÃN˛y ƒÁu |N˛ tƒÁEÁı N˛Á QY| “{¡s §y™Á osÁ uƒuÆ uåÆÊfim osÁ üßÁƒ∆Á¬y §y™Á
ƒÁ¬z gÁbÁ ü§Êáå uüu™Æ™ Nz ˛ EåÏ ú Áo ™ı “Áz T Á@ FÃNz ˛ ¬zQå@
N˛y “{¡s √ÆƒÃÁÆ úu∫mÁ™Àƒøú §y™ÁN˛oÁ| üÆ: FÃ ú∫ uåß|∫ ™Ó¬ øú Ãz ßÁ∫o N˛Áz EÁƒ≈Æ∫oÁ “{ LzÃz Ã∫¬
N˛∫oz “{ uN˛ Æ“ Eúƒ\|å “Áz å uN˛ Euou∫Mo GnúÁt N˛y u\åNz˛ ¬Áß Àú…b øú Ãz úÁu¬Ãy
™ı EÁƒ≈ÆN˛oÁ “{@ uüu™Æ™ ¬TÁÆı \§ E¬T-E¬T \ÁzuQ™ áÁ∫N˛ N˛Áz rÁo “Ázåz YÁu“L@ T¿Á“N˛Áı N˛y EÃÊouw …b
üÁz¢˛ÁF¬ N˛y §Áo \Áoy “{@ FÃN˛Á ÜÆÁå N˛Á ™ÏPÆ N˛Á∫m §Ï∫z üzÃ osÁ uƒuå™ÆÁı Nz˛ §Ï∫z
∫QÁ \ÁåÁ YÁu“L uN˛ uƒtz∆ Nz˛ §y™Á ¬zQå N˛∫åz Nz˛ u¬Æz ™zugN˛¬ §y™Á EÁƒ∫m Nz˛ qzfi
ú∫ EuáN˛ uåß|∫oÁ å ∫“z MÆÁıuN˛ uƒ∆z N˛y \ÁåN˛Á∫y å “ÁzåÁ “{@

QÁÀs
EXZz ∫“åz Nz˛ ÃÊ§Êá ™ı üÁznÃÁ“å ™ı ¬TÁoy “{@ Æ“ ÃÊtß| øú Ãz ÃÀoÁ osÁ
“z¡s §yåÁ §Á\Á∫ Nz˛ ú“¬z Ào∫ ú∫ ßÁ∫o Nz˛ EÁÃÁå “{ uN˛ ƒÁu |N˛ ™zugN˛Ã Y{N˛Eú EsƒÁ
EXZÁ ∫“åz Nz˛ §y™ÁN˛oÁ|EÁz N˛Áz LzÃz GnúÁt ug\Få N˛∫åz YÁu“L åƒyN˛∫m Nz˛ Ã™Æ N˛™ tÁÊƒ ú∫ §cÁ utÆÁ
\Áz Ã™^tÁ∫y N˛y “{¡s Nz˛Æ∫ ‰gzu¬ƒ∫y N˛Áz \ÁL@ FÃy Ã™Æ EXZz ∫“åz Nz˛ ú“¬z ¬©§z
N˛ÁÆ|N˛¿ ™ ™ı LN˛ ÃÏuåu≈Yo N˛∫z ÃNz˛ EÁ{∫ \“Á} ÃÊßƒ “Áz Ã™Æ N˛y úÁ¬ÃyÆÁı ™ı \ÁzuQ™ N˛™ N˛∫åz Nz˛
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statistics - non-life insurance
Report Card: General

GROSS PREMIUM UNDERWRITTEN FOR AND UP TO THE MONTH OF JUNE, 2008
(Rs.in Crores)
JUNE APRIL - JUNE GROWTH OVER THE
INSURER CORRESPONDING PERIOD
2008-09 2007-08 2008-09 2007-08 OF PREVIOUS YEAR
Royal Sundaram 59.46 50.76 190.51 168.13 13.31
Tata-AIG 66.63 53.28 288.68 225.32 28.12
Reliance General 130.22 166.18 556.44 529.05 5.18
IFFCO-Tokio 139.85 102.01 414.18 310.07 33.58
ICICI-lombard 276.28 235.72 1077.12 886.65 21.48
Bajaj Allianz 224.69 183.06 733.53 573.73 27.85
HDFC ERGO General 21.03 17.35 52.25 52.01 0.46
Cholamandalam 52.93 38.20 200.35 147.93 35.44
Future Generali* 8.26 0.00 27.81 0.00 0.00
Universal Sompo** 0.73 0.00 0.91 0.00 0.00
New India 445.53 412.41 1535.63 1444.05 6.34
National 354.59 324.35 1174.13 1048.66 11.96
United India 316.49 271.99 1113.25 1002.73 11.02
Oriental 340.49 306.04 1072.42 1049.76 2.16
PRIVATE TOTAL 980.08 846.56 3541.78 2892.89 22.43
PUBLIC TOTAL 1457.10 1314.79 4895.43 4545.20 7.71
GRAND TOTAL 2437.17 2161.35 8437.22 7438.09 13.43
SPECIALISED INSTITUTIONS
Credit Insurance
ECGC 60.11 50.31 164.70 88.09 86.98
Health Insurance
Star Health & Allied Insurance 62.07 1.53 124.75 36.83 238.74
Apollo DKV* 1.51 0.00 6.95 0.00 0.00
Health Total 63.58 1.53 131.70 36.83 238.74
Agriculture Insurance
AIC 12.81 31.26 53.55 78.39 -31.69
Note: Compiled on the basis of data submitted by the Insurance companies
* Commenced operations in November, 2007.
** Commenced operations in Feb’2008

round up
On 14th July 2008, Institute of Insurance and Risk Management (IIRM) organized
a formal inauguration of the academic year 2008-09 for the students admitted
to the 5th batch of the one-year Post-Graduate Diploma Courses in Insurance
and Risk Management; and 2nd batch of the two-year P G Course in Actuarial
Sciences.
Mr. Vepa Kamesam, Managing

Director, IIRM welcoming Mr. J. Hari
Narayan, Chairman of IRDA and IIRM.
Mr. J. Hari Narayan addressing

the students of IIRM.

events
07 – 08 Aug 2008 Fostering Quality Healthcare for All

Venue: New Delhi By FICCI, New Delhi.
11 - 13 Aug 2008 Programme on Marketing Strategies (Life)

Venue: Pune By National Insurance Academy, Pune.
18 - 19 Aug 2008 Symposium on Risk Management

21 – 23 Aug 2008 Programme on Frontline Marketing Strategies

26 - 27 Aug 2008 Globalization of Finance –

Venue: Bangalore Capturing New Growth Markets
By India Retail Banking & Insurance Forum
29 – 30 Aug 2008 Seminar on Current Issues

Venue: Mumbai in Life Assurance (CILA)
By Institute of Actuaries of India
21 - 23 Sep 2008 9th China Rendezvous 2008

Venue: Shanghai, China By Asia Insurance Review, Singapore.
22 – 23 Sep 2008 CD Deshmukh Seminar on Balance Score

Venue: Pune Card for Life Insurance Industry
By National Insurance Academy, Pune.
24 – 25 Sep 2008 4th Insurance Executives’ Summit on Technology

Venue: Shanghai, China By Asia Insurance Review, Singapore.

RNI No: APBIL/2002/9589
“ view point
Senior management should comprise people with experience in a broad range of
risks. Indeed this is easier said than done with risk management expertise being a
scarce commodity, especially so here in Asia.
Ms Teo Swee Lian
Deputy Managi ng Director, Prudential Supervision,
Monetary Authority of Singapore
The underlying purpose of allowing an insurer to determine its MCR (minimum capital
requirement) based on its internal model is to have capital requirements that better
reflect the nature and extent of risks in the insurer’s particular business structure
and business mix.
Mr John Trowbridge
Member, Australian Prudential Regulation Authority
While protection of policy-holders’ interest is paramount to the regulator always,

we will also ensure the spread of insurance in rural and health sectors.
Mr J Hari Narayan
Chairman, Insurance Regulatory & Development Authority, India
While the external sector remains important, domestic demand now has a more
significant role in driving the growth process. In addition, the services sector has
become a more important source of growth.
Dr Zeti Akhtar Aziz
Governor, Bank Negara Malayasia
As we debate the opportunities and challenges ahead, I believe it is essential for

both regulators and the industry to forge a close partnership. For regulators, one
key objective is to provide a balanced regulatory environment so as to improve and
promote sound competition.
Mr Yoon Jeung-Hyun
Chairman, Financial Supervisory Commission, Korea
As supervisors, we must retain our resolve, as must the industry; to ensure that the
lessons are ingrained in our memories and acted upon.
Ms Julie Dickson
Federal Superintendent of Financial Institutions, Canada

”

Lapsation in Life Insurance: The No-Win Deal

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Volume VI, No.

Lapsation in Life Insurance

The No-Win Deal

’Ë◊Ê ÁﬂÁŸÿÊ◊∑§ •ı⁄U Áﬂ∑§Ê‚ ¬˝ÊÁœ∑§⁄UáÊ

© 2007 Insurance Regulatory and Development Authority.

IRDA Journal (Vol 6 Iss 8).pmd 2 05-08-2008, 23:29

IRDA Journal (Vol 6 Iss 8).pmd 3 05-08-2008, 23:29

Policy Lapsation in Life Insurnace

Retention of Life Insurance Business

Business Retention in Life Insurance

Conservation of Life Insurance Business

Statistics - Life Insurance 4

IRDA Journal (Vol 6 Iss 8).pmd 4 05-08-2008, 23:29

Importance of Retention Ratios

IRDA Journal (Vol 6 Iss 8).pmd 5 05-08-2008, 23:29

IRDA Journal (Vol 6 Iss 8).pmd

Group Single Premium 0.14 0.51 2.15 0 0 0 227 856 1719

11 Max New York

11 Max New York

IRDA Journal (Vol 6 Iss 8).pmd

Individual Single Premium 0.67 1.68 0.08 116 409 8

CANCELLATION OF BROKER LICENSE

examined the request and advised the Broker to furnish the

irda journal 6 Aug 2008

IRDA Journal (Vol 6 Iss 8).pmd 8 05-08-2008, 23:29

Claim Repudiation in Insurance

Enlightening the Customer

in the next issue...

irda journal 7 Aug 2008

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RETENTION LEVELS OF LIFE INSURERS.

irda journal 8 Aug 2008

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irda journal 9 Aug 2008

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irda journal 10 Aug 2008

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mobility and lack of appreciation of banks, other corporate agents, direct

irda journal 11 Aug 2008

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irda journal 12 Aug 2008

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irda journal 13 Aug 2008

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irda journal 14 Aug 2008

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irda journal 15 Aug 2008

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Figure 1: Primary and Secondary No Lapse Guarantees

Figure 2: Policy Protection Account Value

irda journal 16 Aug 2008

IRDA Journal (Vol 6 Iss 8).pmd 18 05-08-2008, 23:29

Table 1: Mapping Product Features with Policyholder Needs

Temporary financial hardship Premium Holiday, Temporary Vanishing Premiums

Additional death benefit Guaranteed Insurability Option

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irda journal 18 Aug 2008

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profile individual Conclusion

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