IRDA study on 'lapses' to help discover valuations of insurers
Valuations of life insurers will become more transparent, with IRDA deciding to make public a study on lapse ratios of companies.
By TNN |
MUMBAI: Valuations of life insurers will become more transparent, with the Insurance Regulatory and Development Authority (IRDA) deciding to make public a study on lapse ratios of companies.
Among other things, the study will assess impact of lapses on various parameters, including solvency ratio. IRDA will soon come out with a study on lapses. It will analyse data for the ‘02-07 period, which had seen a sharp growth in new business premium for the life insurance industry.
Speaking on the sidelines of an Actuaries’ conference, IRDA member (actuary-life) R Kannan, who is heading the committee, said that an internal study on lapses covering the ‘02-07 period will be available within a month. The study will reflect a company’s experience of lapsation of policies.
Among other things, the study will assess impact of lapses on various parameters, including solvency ratio. IRDA will soon come out with a study on lapses. It will analyse data for the ‘02-07 period, which had seen a sharp growth in new business premium for the life insurance industry.
Speaking on the sidelines of an Actuaries’ conference, IRDA member (actuary-life) R Kannan, who is heading the committee, said that an internal study on lapses covering the ‘02-07 period will be available within a month. The study will reflect a company’s experience of lapsation of policies.
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The study will see the lapsation impact on solvency, persistency ratio. It will also see the impact of lapsation on a company’s expenses. Even though each company follows a different definition of lapsation, the committee has taken the individual company’s data and applied a standard statistical adjustment or an approximation to the individual data. Such an adjustment will help data comparable across companies.
Insurers say that one indication of the lapse ratio is the fact that the assets under management for several companies have not kept pace with their growth. But this is not a surefire indication since it could also reflect the predominance of single premium or policies with a short-term premium. ‘Lapse ratio’ is a term used to measure the extent to which policies are being renewed. Contrary to belief that an insurance company gains from a lapsed policy, non-renewal actually results in losses.
Most policyholders who allow their policies to lapse after the first year feel that the insurance company has gained since they have paid out premium for which they get nothing in return.
But more often than not, a first year lapse results in a loss for the company as the insurer has to incur high commission and acquisition costs.
Also, if a company is found to have higher lapse ratio than expected, it will throw all growth estimates awry. A company, which sees 40% of its policies lapse, will take much longer to double its funds under management, when compared to a company that sells lesser policies but has a lower lapsation rate. Insurers say that lapsations take place either because a policyholder is sold a product that is inappropriate or in cases where the agent himself has dropped out.
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