Lapsation.

Summary.

Lapsation is always the bug-bear of a life insurance company. In India, the

acceptance of a proposal for life insurance necessitates administrative processes
which, together with the agent’s commission and medical charges, cost the Life
insurer almost the whole of the first year’s and a major part of the second year’s
premium. Life insurers may have to adopt a uniform definition for lapsation of
insurance policies to give more leeway to policyholders on premium payments.

A life insurance policy lapses when the subscriber does not pay the premium
within the grace period. . Lapsation of a life insurance policy is discontinuation
of premium payment by the policyholder during the period of operation of the
policy, due to any reason other than the death of the policyholder. The length of
life of a lapsed policy can be defined as the period between the month when the
last premium instalment was paid and the month the policy was issued.

Determination of lapse Rate.

To form the lapse rate for a specific life insurer, the value of lapsed policies for
ordinary life products is divided by the average total life insurance in force
during the time period. This Policy ratio is multiplied by a scaling factor of
100Ordinary life policies include the following types of insurance plans: level
term life; decreasing term; renewable term; traditional whole life; interest
sensitive whole or universal life; and graded-premium whole life. One of the
major causes for the growing lapsation ratio is forced selling by agents to
achieve their targets. Agents also sell policies without taking customers’ needs
into account.

Revival of Policy.

Revival is a valuable contractual right and the insurer has no arbitrary or

discretionary right to refuse reinstatement, if the conditions laid down have been
complied with. An application for revival of a lapsed policy is an exercise of the
existing contractual right and is different from an application for an altogether
new policy. However, whether the revival of a lapsed policy constitutes a new
contract or not for other purposes, it is clear from the operative part of Section
45 of the Insurance Act, 1938 that the period of 2 years for the purpose of that
section has to be calculated from the date on which the policy was effected.

For revival of polices, the following will normally be necessary.

• Arrears of outstanding premiums with interest
• Proof of continued good health
• A fee for reinstatement or revival.

Reasons for Lapsation.

• Lack of proper awareness programs for agents and policy holders.

• Over emphasis on new business credit to agents and offices.
• Lack of motivation and recognition for retention of insurance policy.
• Over attention on new business competitions and incentives.
• Changing expectations and aspirations of the policy holders.
• Non-affordability to pay premiums i.e.Over-Selling.
• Higher commission rates of new business for agents.
 • Lack of care for orphan policies where the original agent stands
terminated.
• Inadequate commission rates of lapsed policies on revival.
• Lack of credit to serving offices for better retention ratios.
• Ignorance of the policy holders about the nature of benefits of the policy.
• Lukewarm interest of the agents in old policies.
• Termination of the agent who sold the policy.
• Premium notices not being received by the policy holders.
• Non-receipt of policy document in some cases.

Measures to reduce Lapsation.

• Products should meet the needs of the customer. A product sold on the
basis of need analysis will ensure that the product meets the customer’s
requirements there by sustaining interest levels in the policy.
• The ability of the customer to pay the premiums should be analysed.
Customer’s financial capabilities, both current as well as projected for
future must be factored in before deciding on an optimum policy/product
size for the customer.
• Agents should focus more on quality of the policy than quantity. Sales
based on incentives will reduce the Lapsation of the policy.
• Flexible products, product Switch, premium holidays etc help to reduce
Lapsation. Unforeseen circumstances/sudden financial constraints, are
unable to pay their premiums.
• Increasing the premium paying options as well as consumer awareness
about these options.
• Reminders can also be sent through e-mails / SMS to
policyholders/agents wherever such information is available.
 Additionally, through in-house contact centre, welcome calling and
reminder calling can also be resorted to.
• Proper grouping of different factors reduce the Lapsation of the policy.
( factors such as duration & type of policy. Product7 channels of
distribution etc…)
• Adding riders with the policy help to reduce the chance of Lapsation.
(NLG Rider. No Lapse Guarantee). In its basic form, NLG protects death
benefit, for a guaranteed period, by not lapsing policy when total
premium paid is more than a pre-defined target premium amount.
• A product such as ULIP shows that Lapsation ratio is less compared to
other products. Policy which provides return to the policy holder will
encourage them to pay the premiums correctly.
• Persistency rewards can be used to reduce Lapsation and to retain policy
for a longer period. ( reward programs such as Interest rate reward and
mortality charge refund.)

Conclusion

Life insurers should be vigilant and seek new ways and means of getting
across to its policyholders to impress on them, the need to keep their policies
alive. The lapsation ratio has improved considerably and it is hoped that in
coming years it would be well below the expected industry norms. By taking a
few proactive measures and ensuring that premiums are remitted in time, not
only does the lapsation of life insurance policies get arrested but it would go a
long way in furthering the larger interests of both the parties concerned viz., the
life insured and the life insurer.