Is it practical for Life Insurers to maintain lapsed ratio within 5 pc

Kathmandu: Beema Samiti has instructed all life insurance companies to reduce their lapsed polcies to 5 percent. Last Thursday, the Life Insurers Association of Nepal held a meeting and concluded that it is not possible to maintain the policy lapse ratio within 5 percent.

Beema Samiti is the regulatory authority for life insurers.

Insurance companies are of the opinion that even in developed countries, the lapse ratio is barely maintained at 5 percent, which is not possible in developing countries like Nepal. Lapse ratio in the USA is 5 percent. The lapse ratio of three other South Asian countries (India, Bangladesh and Sri Lanka) is higher than that of Nepal.
Neighboring south asian country, Bangladesh has the highest spending ratio at 50 percent. With a per capita income of US 1855 (NPR Rs. 218,890), access to insurance in this country is limited to 1 percent. The country’s literacy rate is 72 percent.
Southern neighbour, India has an average lapsed ratio of 25 percent. With a per capita annual income of US 2,099 (NPR Rs. 2,47,682), only 2.82 per cent of India’s total population is covered by insurance coverage. India’s literacy rate is 66 percent.
Sri Lanka, which has a literacy rate of 91 percent, has lapsed ratio 12 percent. Only 1.31 percent of the total population benefits from insurance. Sri Lanka has the highest per capita income. Its per capita income is USD 3853 (NPR Rs. 4 lakh 54 thousand 654).

However, the insurance policy ratio of Nepal’s insurance companies ranges from 1 to 21 percent, according to data released by Beema Samiti. But over the years, insurance companies seem to have improved that ratio significantly.The data of lapsed policy status compiled by Beema Samiti is still doubtful.

Condition of Policy Lapsation:
Generally, if the insured does not pay the annual renewal premium free of cost for 6 months from the date of payment, the insurance policy is considered to have passed automatically. In such a case, the insured will be deprived of most of the facilities under the policy. And insurers also suffer losses due to high cost of agent commission, regulatory royalty, market promotion, staff salary, allowance and other operating expenses.
Reason for Policy Lapsation:
Life insurers remind the insured to pay the premium through SMS, telephone, e-mail and agent in time. But in some cases, such information is not available to the insured due to change of contact number or address of the insured, relocation, foreign employment.
Beside that the tendency of the agent to insure beyond the saving capacity of the insured is also one of the main reason for the high policy lapsation ratio. With the aim of grabbing high commission in the first year, the unprofessional agents ingore the regular income source of the insured.
Beema Samiti has allowed to distribute commission to the agents 25 percent in the first year, 15 percent in the second year and 5 percent from third year onwards till 10th year.
In some cases, the insured may not have paying capacity due to an unexpected contraction in the income source. In such a case, the insured may be forced to neglect to pay the premium regularly.
Sometimes, the agents provoke the insured to make their collective saving of a long period to buy a policy.
The tendency of the insured to spend more than one year on savings or any contingency benefit to buy a life insurance policy, and from the second year onwards, the agent’s tendency to focus only on immediate benefits, such as pay-offs, leads to long-term losses.

Can Bangladeshi model be useful?
Beema Samiti, the regulatory body of insurers, has directed to control the insurance policy ratio to 5 percent, but no time limit has been set. And no way suggested to control it.

The Insurance Development and Regulatory Authority(IRDA), the regulatory body of Bangladesh, a South Asian country with a high insurance ratio, has imposed a condition on the agent’s commission. The insurers have implemented the provision of paying 10 percent of the commission to the agent for the first year only after receiving the renewal premium for the second year. A lump sum is provided for the second year by adding interest to the amount of 10 percent commission withheld. After the implementation of this provision, the collection of renewable insurance premiums has increased and the number of insurance policies has gradually decreased.

Similarly, by withholding a certain percentage of the commission paid for the remaining year and making it available only after the recovery of the insurance premium for the next year, it will help to prevent the insurance policy from being passed and to get the insured into the habit of paying the premium regularly.

Strict underwriting:
It is necessary for the Insurance Committee to demand an action plan from the insurers to reduce the ratio of insured. The life insurers will be under pressure to fulfill the objectives of Beema Samiti if a plan is demanded from the life insurers to bring the current ratio within the prescribed limits for how many years.

Only when the source of income of the insured can be properly identified and the savings capacity can be deducted can the insurance and premium insurance policy be issued.
In addition, the more active agents are able to produce, the more regular contact with the insured will help in controlling the expenditure through positive contribution in insurance premium collection.

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