The Hindu Business Line : High lapse rate seen in term insurance

Chennai, Nov. 27 With the ‘term insurance’ portfolio suffering from a relatively higher lapse rate, experts have called for a fresh look at the incentive structure for agents.

Term policies are low-priced insurance policies that offer protection but do not generate returns on the premiums paid. A recent study by the Insurance Regulatory and Development Authority on ‘Lapsation and its impact on life insurance industry (2002-07)’ has shown that term plans had the highest lapse rates during the period, both in terms of premium (19 per cent) and number of policies (28 per cent).

The problem is continuing, particularly because IRDA dropped the solvency margins for term policies — funds that an insurance company should set aside for meeting future estimated liabilities. With the drop in such set-asides, insurers have been able to bring down the premium on term policies. Consequently, the commission paid to agents, which is a percentage of the premium, has also come down. “The agents have no financial initiative to follow up and remind customers to pay premiums regularly,” says Mr Rahul Aggarwal, CEO, Optima Insurance Brokers.

This may be partially true agrees, Mr S.B. Mathur, General Secretary, Life Insurance Council. “There are not many takers for term insurance since there is no saving element only protection therefore only intelligent people take these policies,” said Mr Mathur.

“There is a need to look into the incentive structure for term policies so as to make it attractive for agents to sell,” says Mr R. Kannan, Member Actuary, IRDA. Mr Kannan told Business Line that term policies are also lapsing more after the drop in premiums because customers find it beneficial to let their old policies lapse buy the new, cheaper ones.

Mr V. Srinivasan, Chief Financial Officer, Bharati Axa Life Insurance, said the fact that premiums are less for term plans could be the reason why people feel that they are not losing anything if the policy lapses. An insured may feel that he has enjoyed a life cover for the premiums paid so far by him and therefore discontinues paying premiums since there is no surrender value for the policy, he said.