- What is persistency ratio?
- How to calculate persistency ratio
- Importance of persistency ratio
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 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.
What is Persistency Ratio?
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.
How Persistency Ratio is 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. 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.
Why do people not make the premium payment of their life insurance policy?
There can be several reasons why life insurance premium is 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.
- Policy is not valuable or important for the policyholder.
- Find a better insurance policy from another company.
Why persistency ratio is important?
A persistency ratio is important for both insurance companies as well as customers.
Importance for Insurance Company
-
Helps to build reputation and goodwill
An ideal persistency ratio of an insurance company helps to build reputation and goodwill in the market. Moreover, it also provides them an edge over their competitors. -
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. -
Reduce customer acquisition cost
An insurance company with a low persistency ratio has to spend more to acquire new customers as compared to a company with a high persistency ratio.
Importance for Customers
-
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. -
Increases overall customer satisfaction
A good persistency ratio increases overall customer satisfaction and trust with the insurance company, their coverage, customer support, claim settlement process, etc.
Conclusion
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.
Persistency Ratio in Insurance: FAQs
1. How an insurance company can increase its persistency ratio?
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.
2. What is an ideal persistency ratio?
A persistency ratio of 80% or higher is considered an ideal persistency ratio for an insurance company.
3. What parameters should an individual consider before buying a life insurance policy?
Before buying a life insurance policy one should consider several parameters such as claim settlement ratio, solvency ratio, persistency ratio, etc.
4. How to calculate the persistency ratio?
The persistency ratio can be calculated in percentage terms using a simple formula: (Number of policies sold/ Number of policies renewed) × 100
5. What is the purpose of measuring the persistency ratio?
The major purpose of measuring the persistency ratio is to check the market reputation and customer satisfaction rate.
6. What are the major reasons for the falling persistency ratio?
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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