What is Persistency Ratio in Insurance?
The insurance market is full of different insurance companies. While buying a suitable life insurance policy, people often get confused about choosing the right insurance company and plan.
Several parameters such as claim settlement ratio, solvency ratio, and persistency ratio help to make the right decision. Claim settlement ratio and solvency ratio are easy to understand by their names. However, people are often confused when it comes to the persistency ratio. Let's understand what the persistency ratio is and how it influences an individual's decision-making.
What is the Persistency Ratio?
The persistency ratio is the ratio of the number of active policies to the number of policies for which payment has been received. This ratio helps us understand an insurance company's customer retention. This ratio can vary for every financial year.
Let's take an example to understand how the persistency ratio works. Suppose an insurance company sold a total of 1500 policies in a particular year, and 1350 policies have been renewed out of 1500. So, the persistency ratio of that particular company is 1350:1500, which can be simplified as 27:30.
How is the Persistency Ratio Calculated?
The persistency ratio is calculated after the end of a particular year. It can be calculated for a period ranging from 1 to 5 years. To know the ratio for the 1st year, the number of policies sold at the beginning of the year and the premium received for renewal in the 13th month are used. Similarly, for 2 years, the 25th month is taken, and for 4 years, the 49th month is taken into effect.
Persistency Ratio = (Number of policies renewed / Number of policies sold) × 100
Suppose an insurance company sold 1000 policies and received renewal premiums for 870 policies. The persistency ratio will be (870/1000) × 100 = 87%.
A persistency ratio of 80% or more is considered good for an insurance company. The persistency ratio decreases when people do not make premium payments.
Why Do People Not Make Premium Payments for Their Life Insurance Policy?
There can be several reasons why life insurance premiums are not paid by people:
- They are not satisfied with their insurance policy.
- The insurance company did not address their queries.
- Due to financial constraints, they are not able to pay their premium.
- The policy is not valuable or important for the policyholder.
- They find a better insurance policy from another company.
Why is the Persistency Ratio Important?
A persistency ratio is important for both insurance companies and customers.
Importance for Insurance Companies
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Helps to build reputation and goodwill
An ideal persistency ratio for an insurance company helps to build its reputation and goodwill in the market. Moreover, it also provides them an edge over their competitors.
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Rise in revenue
Before buying a life insurance policy, people look for the persistency ratio of that insurance company. A good persistency ratio attracts customers to purchase their policy from that company.
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Reduce customer acquisition cost
An insurance company with a low persistency ratio has to spend more to acquire new customers compared to a company with a high persistency ratio.
Importance for Customers
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Helps to choose an ideal insurance company
An ideal persistency ratio helps people to purchase an insurance policy from a good insurance company. It creates a sense of trust among customers.
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Increases overall customer satisfaction
A good persistency ratio increases overall customer satisfaction and trust with the insurance company, their coverage, customer support, and claim settlement process.
Conclusion
A persistency ratio plays an important role for insurance companies as well as customers. While purchasing a policy from an insurance company, it's important to look for the persistency ratio. This ratio helps to understand the customer retention of a particular insurance company and make an ideal decision.
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