Term of the day: Insurance persistency ratio

Photo: Indranil Bhoumik/Mint

Photo: Indranil Bhoumik/Mint

In life insurance, persistency ratio is an important metric to track as persistency is a key driver of profitability for an insurer. In insurance parlance, policy retention is known as “persistency” and “persistency ratio” measures how long customers stay with their policies, by looking at the number of policy renewals year after year. The ratio is measured both by the policy number and premium collected. Persistency ratio that’s disclosed by the insurance company measures the number of policies (both by count and premium) that continue in its books by the end of the first year (13th month persistency), second year (25th month persistency), third year (37th month persistency), fourth year (49th month persistency) and fifth year (61st month persistency).

It’s important for insurers to maintain a persistent book as it not only contributes to profitability, but also helps in reducing costs through economies of scale. Even for customers with life insurance policies that bundle as investment plans, it is important to continue with the policies to benefit from it fully.

[“Source-livemint”]