Persistency Rate

The persistency rate is a key metric used in the insurance industry to measure the rate at which insurance policies remain in force over a period of time. It indicates how well an insurance company retains its policyholders and avoids policy lapses or cancellations. A high persistency rate is generally a positive sign for the insurer, reflecting customer satisfaction, product value, and the company’s overall financial health.

Calculation

The persistency rate 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 active 13 months after they were initially issued.

Formula

Persistency Rate = (Number of Policies in Force at End of Period / Number of Policies in Force at Beginning of Period) x 100

Factors Affecting Persistency Rate

Several factors can influence the persistency rate, including:

• Customer Satisfaction: Satisfied customers who have positive experiences with the insurer are more likely to renew their policies.
• Policy Value: Policyholders who perceive value in their insurance coverage and feel it meets their needs are more likely to keep their policies active.
• Affordability: Affordable premiums and flexible payment options contribute to higher persistency rates.
• Economic Conditions: Economic downturns or financial hardship can lead to policy lapses due to an inability to pay premiums.
• Competition: Increased competition in the insurance market can affect persistency as policyholders may switch to other insurers offering lower prices or better benefits.
• 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.
• Underwriting Quality: Proper underwriting ensures that policyholders are appropriately classified and charged the right premiums, which can improve persistency.
• Customer Service: Excellent customer service and effective communication can help retain policyholders and improve persistency.

Importance of Persistency Rate

• 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 Rate

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

• Enhancing Customer Service: Providing excellent customer service and building strong relationships with policyholders.
• Offering Competitive Products: Offering competitive and valuable insurance products that meet customer needs.
• Providing Flexible Payment Options: Making it easier for policyholders to pay premiums through various payment methods and flexible payment plans.
• Improving Communication: Communicating regularly with policyholders, providing them with clear and concise information about their policies and benefits, and addressing their concerns promptly.
• Conducting Policy Reviews: Regularly reviewing policies with policyholders to ensure the coverage remains adequate and meets their changing needs.

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.

The persistency rate 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.