Persistency

In the insurance industry, persistency refers to the rate at which insurance policies remain in force over time. It’s a measure of how well an insurance company retains its policyholders and avoids policy lapses or cancellations. A high persistency rate indicates that policyholders are keeping their policies active and renewing them, which is a positive sign for the insurer’s profitability and customer satisfaction.

Here’s a breakdown of persistency

Calculation:

Persistency is typically calculated as the percentage of policies that remain in force at a specific point in time compared to the number of policies that were in force at an earlier point in time. For example, a 13-month persistency rate measures the percentage of policies that are still in force 13 months after they were initially issued.

Factors Affecting Persistency

• Customer Satisfaction: Satisfied customers are more likely to renew their policies.
• Policy Value: Policyholders who perceive value in their insurance coverage are more likely to keep their policies active.
• Affordability: Affordable premiums contribute to higher persistency rates.
• Economic Conditions: Economic downturns can lead to policy lapses due to financial hardship.
• Competition: Increased competition in the insurance market can affect persistency as policyholders may switch to other insurers.
• Policy Type: Different types of insurance policies have different persistency rates. For example, life insurance policies generally have higher persistency rates than property and casualty policies.

Importance of Persistency

• Profitability: High persistency rates are associated with higher profitability for insurers, as they retain premium income and reduce the costs of acquiring new customers.
• Customer Loyalty: Persistency reflects customer loyalty and satisfaction with the insurer’s products and services.
• Financial Stability: High persistency contributes to the financial stability of the insurance company.
• Growth: Retaining existing policyholders is essential for the long-term growth of an insurance company.

Improving Persistency

Insurance companies can take various steps to improve persistency, including:

• Customer Service: Providing excellent customer service and building strong relationships with policyholders.
• Product Value: Offering competitive and valuable insurance products that meet customer needs.
• Flexible Payment Options: Providing flexible payment options to make it easier for policyholders to pay premiums.
• Communication: Communicating regularly with policyholders and providing them with information about their policies and benefits.

Example

An insurance company has a 13-month persistency rate of 85% for its term life insurance policies. This means that 85% of the policies issued 13 months ago are still in force.

Persistency is a crucial metric for insurance companies, reflecting customer satisfaction, profitability, and overall financial health. By focusing on customer retention and providing valuable insurance products and services, insurers can improve persistency and achieve sustainable growth.