Steady rise in policy lapse rate puts insurers in a fix

Saturday 22, November, 2008 HYDERABAD: Scores of life insurance policy holders run the risk of losing their insurance covers when they fail to renew the policy within a deadline. This is not a happy situation for insurers either, as termination of policies could impact their business. Between 2002-03 and 2006-07, policy holders forfeited premium aggregating to Rs 20,500 crore due to lapses, according to a recent research paper by the insurance regulator on the impact of lapses on insurers. The total amount exposed to lapses was around Rs 3,36,183 crore during this period. The lapse rate — the amount of lapses in any given year as a proportion of the total amount exposed to lapses in that year — was a tad over 6%. A year-on-year comparison showed a steady rise in the lapse rate. The lapses were higher in the popular savings instrument — Unit-Linked Insurance Plans (ULIPs) — compared to traditional insurance products. The high commission charged on ULIPs in the initial years could have been a deterrent. But the highest rate of lapse was in term assurance products. Pension policies had the lowest lapse rate. A policy holder can revive an insurance policy by paying premium that are due along with the interest. But this seldom happens in India. The revival period varies among companies and is also different for different products. But most life insurers give a grace period of 28 days to policy holders for renewing their premium. The regulator reckons that varying lapse definitions could distort the assessment of a company’s performance vis-à-vis its rivals. It could also create confusion among policy holders. A short grace period could result in more policy lapses and be unfair to policy holders. A relatively long grace period could compel the insurer to provide free cover for a longer period and this could result in a financial loss.

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