Private Life Insurer’s Lapse Ratio Doubles in Traditional Plans

The lapse ratio has more than doubled during financial year 2011-12 for many private sector life insurance companies in case of traditional insurance policies bought by individuals.

In general, lapse is the discontinuance of a policy by non-payment of premiums by the policyholder within the 15 to 30 days grace period.

Lapses typically occur when clients have been mis-sold or force sold a policy.

Among the insurers, Birla Sun Life had the highest lapse ratio of 51% in FY’12, down from 71.6% in FY’11, followed by Future Generali Life at 48.9%  in FY’12 (24.6% in FY’11) ICICI Prudential Life at 41.9% in FY’12 (46.5% in FY’11), Reliance Life at 38.5% (15.7% in FY’11) and Bharti Axa Life at 36.1% in FY’12 (18.9% in FY’11).

State-owned Life Insurance Corporation of India’s (LIC) lapse ratio for FY’12 stood at 5% compared with 4.9% in FY’11.

Lapsation affects the profitability of a life insurance company. According to a study released by Insurance Regulatory and Development Authority (IRDA) in November 2008 titled ‘lapsation and its impact on the life insurance industry’, in case, an endowment policy lapses during the later years of the policy term, an insurer may be profited by forfeiting the mathematical reserves built under that policy. In other words, consumers going away in case of endowment plans may actually help boost profits of insurers.

In the same lines, since in case of endowment product, the asset share is built over the period of time and if the lapse occurs in the initial phase, then this would result to a loss to the insurance company because insurers will not be in a position to recover the fixed cost incurred in writing the policy. Moreover, if lapses are high in the initial phase, insurers will not be in a position to recover the fixed cost and hence, the deficit in fixed cost recovery is to be borne by the shareholders.

However, many people confuse lapsation with surrenders. Surrender refers to a situation where policyholder surrenders his policy and takes the surrender proceeds as specified in the policy document. Whereas, in case of lapses, within some specified time, the policyholder may revive the lapsed policy by paying all the premiums that are due on that date and proving continued insurability. This normally involves declaration of good health and/or undergoing medical  tests as prescribed by an insurer. Normally in case of a lapsed policy, there is no sum accruing to the insured individual that can be cashed in.

But, the proportion of such revivals is less than 3% and, hence, majority of lapses are permanent in nature.