ISSN: 2249-7196

IJMRR/May 2016/ Volume 6/Issue 5/Article No-1/560-566

S. Subashini et. al., / International Journal of Management Research & Review

A STUDY ON LAPSATION OF INSURERS IN LIFE INSURANCE POLICIES IN

COIMBATORE
S. Subashini*1, Dr. R. Velmurugan2
1
Research Scholar, Dept. of Management Studies and Research, Karpagam University,
Karpagam Academy of Higher Education, Coimbatore, Tamil Nadu, India.
2
Assoc. Prof, Dept. of Commerce, Karpagam University, Karpagam Academy of Higher
Education, Coimbatore, Tamil Nadu, India.
ABSTRACT
The foremost problem faced by insurance industry sector is the growth of lapsation rate.
Lapsation means that an insurance contract ceases to exist. A policy lapses if the policy
holder fails to pay premium after a stipulated grace period of 30 days in a policy. The main
reasons for the lapse in insurance policies is because of mis-selling, unfair business practice,
delay in claim settlement and poor policy servicing. Mis-selling complaints is the dominate
kind of grievances in the life insurance industry (Source: IRDAI Annual Report 2014-15).
Companies loss their profits in the form of lapsation. It is one among biggest threats in the
industry. The objective of the study is to understand the reasons for policies lapsation
between public and private sector insurance companies. The primary data was collected by
using the structured questionnaire and secondary data was collected from journals,
newspapers and the internet. The study area is limited to Coimbatore District.
Keywords: Life insurance, Lapsation, Mis-selling.
INTRODUCTION
Lapsation means that an insurance policy ceases to exist. A policy lapses if the policy holder
fails to pay premium after a stipulated grace period of 30 days for a policy. Some of the
factors that can be attributed to lapsation are unexpected change in policyholder’s financial
position, uncertainty in job market and failure to pay premiums on time. The lapse rate has
been reduced due to some policies have auto-cover facility and policyholders have the option
to pay premiums as per their convenience. A large chunk of insurance policies from private
insurers lapsed because investors did not pay their renewal premium (Source: IRDA’s
Handbook of Statistics reveal). The lapse ratio was as high as 51 per cent for Birla Sun Life
Insurance, 48 per cent for Future Generali and at 43 per cent and 36 per cent, respectively for
ICICI Prudential and Bharti Axa Life in 2014-15 (Source:www.Businessstandard.com).
STATEMENT OF THE PROBLEM
Lapse ratio is the proportion of policies where renewal premium was not paid. A majority of
private insurers saw less than half their policyholders staying on after the fifth year.
According to IRDA (Insurance Regulatory & Development Authority of India), life insurers
*Corresponding Author www.ijmrr.com 560
 S. Subashini et. al., / International Journal of Management Research & Review

had to pay nearly Rs 70,000 crores on account of surrenders in fiscal 2014. A break in the
regular inflow of premium from the customer to the insurer results into a chasm in the
structure of the policy results is company impact, customer impact, and distributor impact. In
the world scenario, Americans who are aged 65 or older leave approximately $112 billion in
benefits on the table each year by lapsing or surrendering their life insurance policies,
according to new research unveiled at the Life Insurance Settlement Association's (LISA)
Fifth Annual Institutional Investor Life Settlement Conference.(Source:
https://globenewswire.com/news-release/2015). In India investors lost 1.5 trillion due to
insurance lapsation.(www.Businessstandard.com). Hence, the study reveals the causes of the
lapsation of insurance policies among insurers and to suggest appropriate measures to bring
down the lapse rate.

(Source: http://www.cii.co.uk/)
REVIEW OF LITERATURE
Rajagopalan,V (2008) [1] in his study entitled “Lapsation of Life Insurance policies” asserts
that there is a very high level of competition for personal savings from the various retail
financial service providers and their products and this also has an impact on the business
retention levels of life insurers. His findings are termination of policies at early durations
results in loss and wastage of efforts for all the participants in the deal; namely, the
policyholder, the agent and the insurance company. Rajasekhar (2008) [2] in his study
entitled “Persistency of Business” asserts that there is a huge role to play for all the
stakeholders in arresting the lapsation trends in life insurance. His findings includes Insurer,
as business owner, is better placed to control lapsation and thereby to improve persistency.
David Chandrasekharan (2008) [3] in his study entitled “Policy Lapsation in Life
Insurance” emphasizes that the intermediary’s role is very crucial in keeping the contracts in
life insurance in force. His findings includes agency termination and lapsation, is a curse of
the life insurance industry and the two are interrelated. Amitabh Verma (2008) [4] in his
study entitled “Retention of Life Insurance Business” opines that high business retention
ratios indicate the health of a company. He further adds that insurers should adopt dynamic
methods of ensuring that a customer does not go out of their reach. He adds the reason for
lapse of policy is due to persistency. It is one of major deciding factors for policy pricing
amongst other factors such as mortality, interest earned, expenses etc. Sonig, H.O.(2008) [5]

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 S. Subashini et. al., / International Journal of Management Research & Review

in his study entitled “ Business Retention in Life Insurance” mentions that rather than chasing
fresh prospects, insurers should concentrate on long term retention of the existing
policyholders, which is certain to leads to reduction of expenses as well as growing
reputation. His findings were the care for lapsed policy with efforts to revive it creates a
feeling of loyalty in the minds of the policy holders. He suggested that insurance companies
should consider appointing retention managers or outsourcing job to revive lapsed policies to
private establishments with the help of insurance agents. More number of studies have been
carried out in measuring policyholders satisfaction. But very few studies have been carried
out in ascertaining research for lapsation of life insurance policies, in order to fill this gap the
present study has been carried out.
OBJECTIVES OF THE STUDY
The present study has been carried out to assess the following:
• To identify the causes of lapsation among life insurance companies
• To suggests the steps to bring down lapsation
METHODOLOGY
Data: Data required for the study is primary in nature. The primary data have been collected
by making use of well structured questionnaire.
Area of the study: The present study is confined to employers that of sales managers and
branch managers of both public and private sector insurance companies in Coimbatore
district.
Sample Design: By adopting convenient sampling method, data have been collected from
300 respondents, comprising of sales managers and branch managers of both public and
private sector life insurance companies in Coimbatore district.
Sample Size: There are totally 24 Life insurance companies are operating in Coimbatore
district. Among that 53 respondents selected from the public sector company i.e LIC. Total
numbers of branch managers from LIC are 12 and sales managers are 41. The total number of
samples selected from the private sector are 247 among that 180 of them are sales managers
and 67 are branch managers. The samples are selected based on the availability of the
managers in their respective branches.
Framework of Analysis: The collected data have been analyzed by making use of Factor
Analysis. It is used to identify the causes of lapsation separately for LIC and other private
insurers.
Analysis and Interpretation: To identify the causes of lapsation Factor Analysis is
employed. The following table illustrates the various causes of lapsation in LIC. Kaiser-
Meyer-Olkin (KMO) and Bartlett’s Test of Sphericity has been used as Pre-analysis testing
for the suitability of the entire sample for factor analysis. The result of KMO and Bartlett’s
Test is found greater than 0.70. Hence, the collected data is fit for employing factor analysis.
Further, the large values of Bartlett’s sphericity test (309.138, df=231, Sig=0.000) and KMO
statistics (0.780) indicated the appropriateness of factor analysis i.e., the sample was

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 S. Subashini et. al., / International Journal of Management Research & Review

adequate. Table 1 shows the results of factor analysis carried out using the various causes of
lapsation of life insurance policies in LIC.
(a) Causes of Lapsation – LIC- KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .780
Bartlett's Test of Sphericity Approx. Chi-Square 309.138
df 231
Sig. .000

Table 1: Causes of Lapsation – LIC

Factors 1 2 3 4 5 6 7 8 9
Limited Benefit in the
Product 0.074 -0.219 0.159 -0.039 -0.032 -0.022 0.148 -0.708 0.436
High Premium Rate 0.148 0.096 0.761 0.235 0.111 0.243 -0.159 0.184 0.126
Poor Customer Service 0.167 0.055 0.078 0.064 0.838 0.017 0.169 0.070 -0.006
Mis-selling of the
Product 0.078 0.538 -0.190 0.070 0.187 -0.073 -0.368 -0.335 0.291
Delay in Renewal
Notice 0.792 0.182 -0.074 0.152 0.062 -0.062 0.115 0.207 0.005
Improper Training to
the Agents 0.283 0.011 0.267 -0.212 0.078 0.214 0.532 -0.075 0.074
Lack of faith about
company’s past
performance -0.039 -0.431 0.108 0.229 0.069 -0.266 0.079 0.211 0.457
Previous experience
about delay in claim
settlement 0.128 -0.116 0.057 -0.091 0.002 0.108 -0.007 0.776 0.214
Low awareness about
protection of life -0.080 0.733 0.031 -0.052 -0.110 0.051 0.147 0.030 -0.009
Complex revival
procedures 0.163 -0.113 -0.187 0.089 -0.283 0.546 0.280 0.195 0.291
Poor rapport with the
customers 0.056 0.128 -0.036 -0.719 0.374 0.114 0.030 0.081 0.204
Financial burden for
the policyholders 0.122 0.014 0.170 0.804 0.161 0.192 -0.024 -0.033 0.112
Loss of customers
confidence due to bad
word of mouth from
others 0.280 0.086 -0.811 -0.029 0.037 0.218 -0.190 0.182 0.030
Frequency change of
customer address 0.727 -0.166 -0.102 -0.086 -0.017 0.153 -0.205 -0.146 -0.107
Wrong prospecting of
customers -0.489 0.221 -0.370 0.392 0.257 -0.227 0.089 0.127 -0.004
No transparency in the
procedures 0.062 -0.097 0.045 -0.020 -0.045 0.049 -0.818 0.064 -0.019
Inadequate skills of
sales person -0.047 0.137 0.034 -0.065 -0.057 0.134 -0.006 -0.012 0.762
Low bonus declaration 0.411 0.106 0.070 0.183 -0.722 0.102 0.191 0.106 0.109
Procrastination in
paying premium -0.095 0.053 -0.031 0.143 -0.001 0.017 -0.064 -0.040 0.086
Agent force to cancel
existing policy and
make to purchase
another new policy -0.350 0.333 0.258 -0.295 0.088 0.144 0.324 -0.064 -0.276
Customers feel it is
useless investment -0.009 0.042 -0.082 -0.031 -0.048 -0.904 0.056 -0.060 -0.018
Availability of
alternative investment -0.154 -0.664 -0.004 -0.028 -0.175 0.301 -0.010 -0.071 -0.094
Eigen Values 2.613 2.043 1.966 1.872 1.584 1.517 1.367 1.254 1.180
% of Variance
Explained 11.878 9.286 8.934 8.509 7.200 6.896 6.213 5.698 5.364
Cumulative % of
Variance 11.878 21.164 30.098 38.607 45.807 52.703 58.917 64.615 69.978

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 S. Subashini et. al., / International Journal of Management Research & Review

RESULTS AND DISCUSSION

Nine factors are identified by locating Eigen values greater than unity. The reasons which
have component loading of 0.5 and above are said to be significant factors that are the major
reasons of lapsation in Public Sector Company. From the rotated component matrix Table 1 it
can be seen that “Delay in Renewal Notice”, “Frequency change of customer address” has a
component loading of 0.5 and above. Hence, these two variables form first factor. From the
table it can be seen that delay in renewal notice, frequency change of customer address, low
awareness about protection of life, mis-selling of the product, high premium rate, financial
burden for the policyholders, poor customer service is provided, complex revival procedures,
improper training to the agents, previous experience about delay in claim settlement and
inadequate skills of sales person are the causes for the lapsation of the policies in LIC.
Causes of Lapsation – Private Insurers
The result of KMO and Bartlett’s Test is found greater than 0.70. Hence, the collected data is
fit for employing factor analysis. Further, the large values of Bartlett’s sphericity test
(471.858, df=231, Sig=0.000) and KMO statistics (0.849) indicated the appropriateness of
factor analysis i.e., the sample was adequate. Table 2 shows the results of factor analysis
carried out using the various causes of lapsation of life insurance policies among private
insurers.
KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .849
Bartlett's Test of Sphericity Approx. Chi-Square 471.858
df 231
Sig. .000

Table 2: Causes of Lapsation – Private Insurers

Factors 1 2 3 4 5 6
Limited Benefit in the Product 0.072 -0.038 0.081 -0.001 0.013 0.016
High Premium Rate 0.067 0.522 0.276 0.043 0.141 0.169
Poor Customer Service is provided -0.094 -0.068 0.806 -0.068 0.045 0.031
Delay in Renewal Notice 0.087 0.115 -0.064 -0.100 0.038 0.723
Mis-selling of the Product 0.660 0.127 -0.043 -0.114 0.061 0.053
Improper Training to the Agents -0.051 -0.074 0.118 -0.064 0.666 0.051
Lack of faith about company’s past performance 0.124 0.504 -0.038 -0.107 -0.025 -0.088
Previous experience about delay in claim settlement 0.446 0.078 0.121 -0.075 0.129 -0.304
Low awareness about protection of life -0.039 -0.084 0.068 0.790 -0.017 -0.015
Complex revival procedures 0.058 0.139 -0.028 -0.027 0.107 0.099
Poor rapport with the customers -0.098 0.289 -0.050 -0.300 -0.450 0.208
Financial burden for the policyholders -0.033 0.049 -0.028 0.803 0.001 -0.082
Loss of customers confidence due to bad word of mouth
from others 0.151 0.689 0.108 0.009 -0.020 0.038
Frequency change of customer address 0.042 0.148 0.795 0.116 -0.018 -0.077
Wrong prospecting of customers -0.021 -0.117 -0.008 -0.075 -0.074 0.464
No transparency in the procedures 0.457 0.018 0.010 0.162 0.374 0.121
Inadequate skills of sales person 0.036 0.189 -0.105 -0.039 0.698 -0.006
Low bonus declaration 0.250 0.072 -0.085 -0.012 0.049 -0.579
Procrastination in paying premium 0.126 0.007 0.034 -0.121 -0.038 -0.107
Agent force to cancel existing policy and make to
purchase another new policy -0.562 0.150 -0.005 -0.175 0.300 -0.214
Customers feel it is useless investment -0.586 -0.163 0.036 0.043 -0.003 0.278
Availability of alternative investment 0.020 -0.571 0.366 0.048 -0.056 0.069
Eigen Values 2.145 1.799 1.555 1.440 1.334 1.268
% of Variance Explained 9.749 8.176 7.069 6.545 6.062 5.765
Cumulative % of Variance 9.749 17.925 24.994 31.538 37.600 43.365

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 S. Subashini et. al., / International Journal of Management Research & Review

Six factors are identified by locating Eigen values greater than unity. The reasons which have
component loading of 0.5 and above are said to be significant factors that are the major
reasons of lapsation in private insurers. From the rotated component matrix Table 2 it can be
seen that “Mis-selling of the Product” has a component loading of 0.5 and above. Hence,
these variable form first factor.
From the table it can be seen that mis-selling of the Product, loss of customers confidence
due to bad word of mouth from others, high premium rate, lack of faith about company’s past
performance, poor customer service is provided, frequency change of customer address,
financial burden for the policyholders, low awareness about protection of life, inadequate
skills of sales person, improper training to the agents and delay in renewal notice are the
causes for lapsation in private insurers.
SUGGESTIONS
 A lot of mis-selling is taking place, as a result people are losing faith in the insurer. Many
agents do handwritten calculation that can be easily manipulated. Policy holders at the
inception of the policy should be aware of those calculations and they should not let the agent
to fill the policy form.
 The industry is facing the risk of bad publicity due to mis-selling. Because of this
policyholders decline insurance policies just because of bad publicity by friends, relatives etc
as they lose faith in it. Insurers should create trusts and confidence by avoiding mis selling
and offering better services.
 Recognizing the claimant's rights for a fair and prompt consideration is an important
aspect of to create faith about companies past performance. Insurers should provide simple,
transparent and fair process to increase faith among policyholders.
 The reason for the policy being lapsed was the frequent change of address of the party. In
such cases, the parties or the agents and Development Officers usually had not informed the
office of the change in their mailing address. Therefore, the policy premium notices, the final
lapse intimation letters, revival campaign letters does not reach the concerned policyholders.
A proactive approach on the part of all i.e. the insurer, the agents and the Development
Officers would be needed to see that such instances do not occur and to ensure that maximum
number of policies are kept in force or revived if already lapsed.
 The induction of new players has changed the market scenario that is now more vibrant
and more demanding of better customer services. Cashless settlement is one of the prominent
changes, which has benefited the customers. With the use of technology and developing
innovative products will help to create better customer service to the policyholders.
 Because of low penetration levels there is lack of awareness about the benefits of
insurance. Insurers with the help of agents can run customer awareness program, Apart from
that, they can set up kiosks at various places and spread insurance awareness of the insurance
products of the insurer, collect names/ addresses of the people/prospects, pass on the details
to the insurer for leads etc.
 Insurance companies must recruit many dynamic and positive attitude sales people, whom
one interaction with the customer remains in their mind most pleasant and unforgettable for
the entire lifetime.

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 S. Subashini et. al., / International Journal of Management Research & Review

 Renewal of the policy is an area of critical concern and there should be provision to inform
the policyholder well in advance of the expiry date if the insurance is not going to be renewed
or the terms are to be restricted. If policyholders take different policies from same company
the different renewal dates cause confusion, added inconvenience, risk of missing renewals,
high incidental costs for agents. Hence the insurers can give importance to the single
premium policies to avoid the lapsation of policies.
 Lapsation is due to low awareness levels, poor servicing and unsuitable design of products.
Low awareness levels as regards the nuances of insurance contracts lies at the bottom of the
problem. In order to avoid such a situation, the terms and conditions under the contract
should be made very explicit and wherever necessary, emphasis should be laid on the
exclusions so that the policyholder is aware of the details of coverage under the policy.
 At times the policyholders may simply forget to remit the renewal premium. They may
have a change of address which may not have been intimated to insurance company due to
which the reminder / renewal notices do not reach them. Insurers should follow a wide
approach in sending reminders such as via email, messages, through phones and watsapp.
CONCLUSION
The growth in the life insurance sector is especially resulted in the development of many
policies. But, at the same time the sector started to face the problems of lapsation. The
lapsation of policies in life insurance sector is creating obstacles for the growth of the entire
industry. Hence, it to be understands that the need for the marketers to convey the
information about policy dues to the customers must be increased. Finally, it is to be
concluded that the lapsation in the life insurance policy not only creating problems to the
growth of life insurance companies but also effecting the growth of the economy also.
REFERENCES
[1] Rajagopalan V. Lapsation of Life Insurance Policies. IRDA Journal 2008; VI(8): 8-12.
[2] Rajasekhar. Persistency of Business. IRDA Journal 2008; VI(8): 13-19.
[3] Chandrasekharan D. Policy Lapsation in Life Insurance. IRDA Journal 2008; VI(8): 20-
23.
[4] Verma A. Retention of Life Insurance Business. IRDA Journal 2008; VI(8): 23-25.
[5] Sonig HO. Business Retention in Life Insurance. IRDA Journal 2008; VI(8); 25-28.
[6] IRDA’s Annual Reports from 200-01 to 2015.

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