Policy lapse likely to cost life insurance agents their licence

KOLKATA: Thousands of life insurance agents face the risk of losing their licences, if half their policies sold lapse within three years, according to a new regulatory norm. It will also cut a substantial source of non-operating income for life insurance companies.

Life insurance agents will have to ensure that 50% of the policies they sell till March 2014 do not lapse, beyond which they will have to maintain a persistency of 75% of the remaining policies, a notification to the chiefs of insurance companies from the Insurance Regulatory Development Authority (Irda) said.

"Low persistency of life insurance policies is a cause for concern for the regulators worldwide," said a statement from Irda. "Early lapses and surrenders are not desirable for any of the stakeholders in the sector. Agents can play a vital role to ensure high persistency by avoiding soliciting unsuitable products, by bringing in transparency in providing
correct and complete details of suitable products to the prospective policyholders and by considering the needs of prospective policyholders."

Insurance agents to earn high commissions sell many policies to an individual dangling the carrot of tax benefits, but the customers struggle to maintain their policies year after year. This has led to an industry average lapse of around 30%, because of which customers lose and companies gain. "The industry average lapse ratio is as high as 30% and the norm will make sure forced selling is reduced," a senior ICICI Prudential official said.

The regulator has also said employees of insurance companies cannot engage their relatives as agents under the same insurer. Agents will also be eligible for taking over orphan policies and would be entitled to receive 50% of the deferred commission the original agent was eligible for. A policy becomes orphaned when its original agent quits the company and is not serviced by anyone.

An insurance policy lapses, if a policyholder fails to pay premium for a specified period. Persistency refers to the percentage of policies that remain in force on a particular date and it is calculated in percentage. Insurers, currently, stipulate targets in terms of number of policies sold and the premium income for their agents and if they cannot achieve these their agency is taken away by the insurer. However, most insurers do not stipulate any persistency ratios for their agents.

Life Insurance Corporation stipulates a 75% persistency ratio for senior agents who are members of clubs like chairman's club and zonal manager's club. Agents are eligible for club membership as they manage to sell a certain number of policies and earn a certain amount of commission. "If agents' persistency levels dwindle, their club memberships are taken away but their licences aren't. For agents who are not members of any club, there is no penalty," said a senior LIC official.

Insurance biggies in the private sector, like ICICI Prudential, or most life companies do not stipulate any persistency for their agents. From July 2011, all agents will have to adhere to the new persistency norm.