ANNUAL REPORT 2007-08
The fixity/inflexibility in the terms of a long term policy contract is another major contributor to lapsation. A decline in the fortunes of the policyholder, altered financial needs or plans or revision in the desired investment mix call for the provision to alter the policy terms, in the absence of which the policyholder may be induced to lapse or surrender a policy.
Lapsation adversely affects all the stakeholders in the industry. The policyholders, who enter a contract with hopes of protection and long term investment benefits, are not only deprived of the same but also end up losing the hard earned monies in the form of premium instalments already paid on the lapsed policy.
Lapsation is one of the most major sources of leakage of revenues for an insurer. The insurers’ cash inflow projections are upset due to non-materialization of expected renewal premium revenues, in turn affecting the expense ratios and profits. This phenomenon leads to a loss of reputation/credibility of the insurers concerned in particular and also the entire industry at a larger level.
The agents witness a fall in their renewal commission incomes as a result of lapsation and also suffer a loss of goodwill of their clients, which in turn adversely impacts their future business prospects.
Lapsation therefore needs to be addressed with the seriousness and urgency it deserves by all concerned. The industry needs to evolve more flexible products and more convenient and automated premium payment mechanisms. The sales machinery needs to depend on fine tuned, customized and need-based selling of policies of affordable ticket sizes rather than follow pushy, short sighted and self absorbed sales techniques. Development of a stable and trained agency force whose remuneration, incentives and credits are linked to control of lapsation helps inculcate disciplined selling and prompt servicing habits among them. The insurers also need to install follow up mechanisms which ensure that premium payments are reminded in advance and that lapsed policies are pursued diligently with the policyholders.