Persistency Ratio in Insurance
- What is persistency ratio?
- How to calculate persistency ratio
- Importance of persistency ratio
The insurance market is full of different insurance companies. While buying a suitable life insurance policy people often get confused in 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 the name itself. However, people are often confused when it comes to the persistency ratio. Let's understand what is persistency ratio and how it influences the decision-making of an individual.
The persistency ratio is the ratio of the number of active policies to the number of policies whose payment has been received. This ratio helps us understand the customer retention ratio of the insurance company. 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 the 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.
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. If anyone wants to know the ratio of 1st year then the number of policies sold at the beginning of the year and the premium received for renewal in the 13th month are used to calculate the persistency ratio of that year. Similarly for 2 years the 25th month is taken and for the 4 years the 49th month is taken into effect.
Persistency Ratio= (Number of policies sold / Number of policies renewed) × 100
Suppose an insurance company sold 1000 policies and received renewal premium for 870 policies so 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.
There can be several reasons why life insurance premium is not paid by people:
A persistency ratio is important for both insurance companies as well as customers.
A persistency ratio plays an important role for an insurance company as well as customers. While purchasing a policy from an insurance company it's important to look for persistency ratio. This ratio helps to understand the customer retention ratio of a particular insurance company and make an ideal decision.
An insurance company can increase its persistency ratio by providing better customer support to customers, offering discounts for customer loyalty, creating value-driven insurance plans, etc.
A persistency ratio of 80% or higher is considered an ideal persistency ratio for an insurance company.
Before buying a life insurance policy one should consider several parameters such as claim settlement ratio, solvency ratio, persistency ratio, etc.
The persistency ratio can be calculated in percentage terms using a simple formula: (Number of policies sold/ Number of policies renewed) × 100
The major purpose of measuring the persistency ratio is to check the market reputation and customer satisfaction rate.
The major reasons for the falling persistency ratio include low customer satisfaction, financial constraints, better opportunities, and a low claim settlement ratio.
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