Calculating Persistency: A Guide To Life Insurance Analytics

The persistency ratio in life insurance is an important metric for both insurance companies and customers. It is the ratio of the number of active policies to the number of policies whose premiums have been paid. This ratio reflects customer satisfaction and loyalty, with a higher ratio indicating that policyholders are happy with the insurance company and intend to continue their policies. Conversely, a low ratio suggests dissatisfaction, signalling that improvements are needed to meet customers' needs. The persistency ratio is calculated using the formula: Persistency Ratio = (Number of policyholders paying premiums / Net active policyholders) x 100. For example, a persistency ratio of 75% means that out of 100% of written insurance policies, 75% are being renewed. This ratio is typically measured annually, at the end of each policy year.

Calculating the ratio of active policies to policies whose payment has been received

When it comes to life insurance, the persistency ratio is a key metric for both insurance companies and customers. This ratio indicates the percentage of policyholders who renew their policies each year, reflecting their satisfaction with the insurer and its services. A high persistency ratio is desirable as it demonstrates customer loyalty, boosts the company's reputation, and ensures stable finances.

To calculate the ratio of active policies to policies whose payment has been received, you can use the following formula:

Persistency Ratio = (Number of policyholders paying premiums / Net active policyholders) x 100

Here's a step-by-step guide to calculating this ratio:

• Identify the total number of policyholders who have active policies with the insurance company. This includes all customers who have a valid and current insurance policy.
• Determine the number of policyholders who have paid their premiums on time. This information can be obtained from the company's records, which should indicate which customers have made timely payments.
• Calculate the ratio by dividing the number of policyholders paying premiums by the total number of net active policyholders.
• Multiply the result by 100 to express the ratio as a percentage.

For example, if an insurance company has 1000 active policies and 800 of those policies have received timely payments, the calculation would be as follows:

Persistency Ratio = (800 / 1000) x 100 = 80%

This persistency ratio of 80% indicates that the insurance company has a high rate of customer satisfaction and renewal. It is a positive indicator for the company's performance and reputation.

It's important to note that the persistency ratio is typically measured at different stages of the policy term. For the first year, the calculation is done in the 13th month. For the second year, it's calculated in the 25th month, and so on. This helps track the persistency ratio over time and identify any changes in customer behaviour or satisfaction.

By understanding the persistency ratio and its calculation, insurance companies can gain valuable insights into their customer retention, identify areas for improvement, and make informed decisions to enhance their services and maintain a loyal customer base.

Using the annualised premium to calculate the ratio

The persistency ratio is a vital metric for both insurance companies and customers. It is the ratio of the number of active policies to the number of policies whose payment has been received. This ratio helps to understand the customer retention ratio of the insurance company.

The persistency ratio can be calculated using the annualised premium or the number of renewed policies. The formula for calculating the persistency ratio is:

> Persistency Ratio = (Number of policyholders paying premiums / Net active policyholders) x 100

The persistency ratio is typically calculated after the end of a particular year and can be calculated for a period ranging from one to five years. The 13th month of the policy term is used to compute a policy's persistency ratio during the first year. In a similar manner, it will be determined for two years in the 25th month, for five years in the 61st month, and so on.

For example, if an insurance company sold 1000 policies and received renewal premiums for 870 policies, the persistency ratio would be calculated as follows:

> (870 / 1000) x 100 = 87%

A persistency ratio of 80% or higher is generally considered good for an insurance company. A low persistency ratio may indicate that customers are dissatisfied with the company, product, or their own financial situation.

The persistency ratio is important for insurance companies as it helps build their reputation and goodwill, attracts customers, and reduces customer acquisition costs. For customers, a high persistency ratio increases overall satisfaction and trust with the insurance company and indicates that other customers are satisfied with the company's products and services.

Using the number of renewed policies to calculate the ratio

The persistency ratio in life insurance is a key metric for understanding an insurance company's performance and customer satisfaction. It is calculated as the ratio of the number of active policies to the total number of policies sold, indicating how many customers choose to renew their policies. This ratio is typically calculated annually and can be measured using either the annualised premium or the number of renewed policies.

When using the number of renewed policies, the formula for calculating the persistency ratio is as follows:

> Persistency Ratio = (Number of policyholders paying premiums / Net active policyholders) x 100

For example, if an insurance company sold 1500 policies in a particular year and 1350 policies were renewed, the persistency ratio would be 1350:1500, which simplifies to 27:30, or 90%. This calculation can also be performed with the number of policies as a percentage, resulting in a ratio of 90%.

The persistency ratio is typically calculated annually and measured at different intervals. For the first year, the calculation is based on the 13th month of the policy, while for the second and third years, it is calculated in the 25th and 37th months, respectively. This pattern continues for longer periods, with the 49th month representing the fourth and fifth years, and so on.

The persistency ratio is an important indicator of customer satisfaction and loyalty. A high ratio indicates that customers are satisfied with the insurance company and its products, while a low ratio may suggest dissatisfaction or issues with the insurer's service. This metric is valuable for both insurance companies and customers when making informed decisions about their insurance choices.

The importance of persistency rates for insurance companies

Persistency rates are critical for insurance companies, reflecting customer loyalty, brand reputation, and overall financial health. Here are some reasons why persistency rates are important for insurance companies:

Predictable Revenue Stream

Consistent policy renewals provide a predictable revenue stream for insurance companies, enabling them to plan for future growth and investments. This stability is essential for maintaining financial health and operational efficiency.

Enhanced Customer Lifetime Value

Long-term policyholders contribute to the overall lifetime value of a customer. Insurance companies can maximize this value by offering loyalty programs, personalized services, and value-added benefits, further strengthening customer relationships.

Stronger Competitive Advantage

High persistency rates serve as a competitive advantage, demonstrating a commitment to customer satisfaction and quality service. This attracts new customers and enhances the company's reputation in the market.

Positive Impact on Brand Reputation

A loyal customer base fosters a positive brand image and reputation. This positive perception attracts new customers and reinforces the company's position as a trusted provider.

Enhanced Customer Insights

Analyzing persistency rates provides valuable insights into customer preferences, satisfaction levels, and areas for improvement. Insurance companies can use these insights to tailor their products, services, and marketing strategies to better meet policyholders' needs.

Reduced Administrative Costs

Retaining existing customers reduces the administrative burden associated with onboarding new policyholders, including paperwork, underwriting processes, and agent interactions, resulting in lower operational costs.

Calculating Persistency Ratio

The persistency ratio is calculated at the end of each policy year. It is determined by the annualized premium or the number of renewed policies. The formula for calculating the persistency ratio is:

> Persistency Ratio = (Number of policies in force at the end of the year) / (Number of policies in force at the beginning of the year) * 100

For example, if an insurance company has 1000 policies at the beginning of the year and 950 policies at the end, the persistency ratio would be 95%.

The importance of persistency rates for customers

The persistency rate is a key metric for insurance companies and customers alike. It is the percentage of customers who renew their insurance policies each year, indicating their satisfaction with the company and its services. A high persistency rate is beneficial for customers as it reflects the company's ability to retain its customers and keep them happy. This also suggests that the insurance company is stable and trustworthy.

For customers, a high persistency rate means predictable healthcare expenses and continuous coverage. It also indicates that the insurance company is likely to have a good understanding of its customers' needs and preferences, and can, therefore, tailor its products and services accordingly. This can lead to enhanced customer insights and improved customer satisfaction over time.

High persistency rates also bring benefits such as reduced administrative costs and an established rapport with care providers. This is because retaining existing customers is less burdensome than onboarding new ones, as there is less paperwork, fewer underwriting processes, and less agent interaction required.

From the insurance company's perspective, a high persistency rate is an indicator of trust and customer satisfaction. It also helps to build credibility and attract new customers. This, in turn, leads to increased revenue and long-term financial gains.

A low persistency rate, on the other hand, can damage an insurance company's reputation and indicate that there are areas of their service that need improving.

Overall, the persistency rate is an important metric for customers as it provides insight into the insurance company's performance and customer satisfaction levels. It helps customers make informed decisions about their insurance choices and ensures they are getting the best possible value and service.

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