LAPSATION OF A LIFE INSURANCE POLICY

Structure:

Meaning of lapsation
Impact of lapsation
How is it different from surrender
Industrial trends
Measures to prevent lapsation of policies

Meaning of Lapsation

When a policyholder fails to pay the insurance premium on due date then the
insurance company (or the insurer) brings this to the notice of the policyholder. A
reminder to the policyholder along with a grace period (i.e. additional days from
the due date, generally 15-30 days) is provided to facilitate the easy payment of
premium. However, even after notification if the policyholder fails to meet the
deadline, the paid amount of premium is forfeited and the policy is termed as
“lapsed”.

It should be kept in mind that during the grace period the policy is said to be in
force. The grace period is give on account of the convenience of the policyholder
to arrange for the premium amount and protect the policy from getting lapsed.
Lapsation of a life insurance policy can be for any reason other than the death of
the policyholder.

In case of ULIPs where the policy is for more than three years, the policy assumes
the paid-up value. It implies that inspite of premium default by the policyholder
beyond due date the policy will be in force as long as the expenses can be
compensated by the paid-up fund. But it erodes the fund value of the insured. On
behalf of the interest of the policyholder, it is always better to prevent lapsation.
On the other side, single premium policies do not involve the risk of lapsation as
premiums are paid in lump sum at the initial stages of the policy document.

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Lapsation is not only a loss on the part of the insured/policyholder (as he/she losses
the premiums already paid) but also hampers the business of insurance company
(as insurance company functions mainly on premium received).

Impact of Lapsation

Premiums received influences the pool of funds created to meet the claims
which may arise and also determines the allocation of funds in different
investment channels. If that inflow of funds, in the form of premium,
becomes irregular due to lapsation of policies then the investment decision is
also gets affected. Therefore, the returns/profitability of the insurance
company is also immensely hampered.

Commissions of the agents are based on the premium received on the

policies brought by them. If the premium defaults, then the future expected
income of the agents are also becomes uncertain.

It hampers the motivation level of the agents to fetch more policies and also
hampers the reputation of the company or the product.

Solvency margin is the minimum requirement of liquid funds set aside by

the insurance company to meet the claims which might arise during the
financial year. Every insurance company is required to maintain the
solvency ratio which is a portion or a percentage of the total premium funds
received by the company after deducting all the relevant expenses. If the
fund is inadequate then the company faces difficulty in maintain the
solvency margin which in return impacts the image of the company.

The initial expenses from the time of the proposal to the time of acceptance
of the policy, insurance companies bears huge underwriting and upfront
organization cost, heavy sales cost and high cost of commission. All these
are paid with the motive to compensate it in the future premiums from the
policy. When the policy lapses, the expenses turns out to be extremely high,
useless, loss on the part of the company.

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Difference in Surrender of a policy and Lapsation

Surrender refers to the situation when the policy is withdrawn at the request of the
policyholder. The term is known as “surrender”. Policy is surrendered and the
proceeds which fall due at the surrendered date are accepted by the policyholder.
The amount thus received by the policyholder is known as “surrender value”.

On the other hand, lapsation occurs due to non-payment of premium when the
policy is in force.

Unlike lapsation, policy surrender is pre-informed to the insurance company.

Industrial Trend

Increase in lapsation and surrender.

Mis-selling being the most common reason.

Forceful selling of various plans not suiting the requirements of the proposed
just to meet the targets of the company.

Lack of follow up initiative on the part of agents to remind clients for

premium payments.

Again, lack of initiative for revival of lapsed policy.

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Measures to prevent Lapsation

Regular contact with the clients and policyholders for reminders as well as
cross selling.

Product customization according to premium payment capability.

Evaluation of risk at the time of approval of policy after appropriate risk

inspection.

Proper selling after understanding the needs and requirements of the client.

Concentrating on selling of single premium policies.

Assuring the intension and utmost good faith of the proposer.

After default, revival should he highlighted and positive aspect of it should

be portrayed to the policyholder.

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 LIFE INSURANCE INDUSTRY-PAST, PRESENT & THE FUTURE

Structure:

Myth about life insurance.

Few prominent reasons for failure.
The Indian Psyche.
Potential of Life Insurance Business in India.
ULIP products

Myth about Life Insurance

Life insurance is not bought out of the will of the proposer but it is sold by
the agents out of there selling capability.

General insurance is bought out of compulsion by law in India (motor

vehicles, public liability, workmen etc.).

For availing benefit of raising loans from financial institutions insurance is

used as collateral security.

It is used as a tax saving tool.

Guaranteed returns are subject to the profit earned by the insurance

companies out of investment in capital market which in itself makes the
return uncertain and volatile.

Competition among the insurance companies being so intense mainly

between the private players fighting with LIC where LIC hardly give some
scope to private concerns.

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Few prominent reasons for failure

Lapsation of policy.
Rules regarding beneficiary clause.
Customer’s Ignorance regarding Cash Surrender Value.
Non-Forfeiture Options.
Ignorance of customer about policy loan and dividend.

Surrender of policy.

Repayment of policy loan.

The Indian Psyche

The psyche of the Indian insurance seeker has been such that they have been
averse to term insurance plans. Term plans require regular premium payments to
be made throughout the tenure of the policy; the sum assured is paid only upon the
unfortunate death of the policyholder during the policy tenure. A mediclaim policy
or car insurance or home insurance or factory/warehouse insurance doesn’t offer
returns. Similarly, there are no returns from a term plan. To worsen matters,
insurance advisors weren’t interested in educating insurance seekers about why
term plans are a must-have for every individual regardless of age.

Potential of Life Insurance Business in India

The vast untapped market in India gives a vast opportunity to the insurance
companies not only situated in India but also from abroad to exploit the
untapped market.

India’s life insurance market has grown at over 40% per year.

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 The penetration level is low in India so there is a huge potential in this
market.

Rural market is yet to be tapped.

The total premium could go up to $80-100 billion by 2012 from the present
$40 billion as higher per capita income increases per capita insurance
intensity.

Private players have been growing aggressively.

The government wants to increase the FDI to 49 %.

Moving from “insurance as tax-saving mechanism” to “insurance as

investment” tool.

ULIP products

The Regulator is in the process of modifying the guidelines for ULIPs so that
products with high concentration of investments will be treated as mutual funds
and term products if the proportion is tilted towards a greater risk. The reviewed is
aimed at bringing in better information, transparency standards and understanding
of such products among customers. Customers should have an idea as to what the
risk and the return in the policy are when they subscribe to them.
The life insurance industry is growing at 30 per cent each year; it’s one of the
fastest growing industries in the country. Private players have captured a sizeable
chunk of the market in these six years, with the Life Insurance Corporation of
India’s (LIC) share in the new business falling to 74 per cent. The upside includes
improved service, riders with policies; unit linked insurance policies health care for
as little as Rs100 per month, need-focused products with flexibility, and sales
channels to suit the customer’s convenience. There’s a wide range of products and

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services competing to deliver the best value to customers, which has increased the
market.
The prospects for India’s insurance sector are good on the back of expected
buoyant economic growth and rising levels of wealth in society. ULIPs have given
Life Insurance market a big boost to grow and expend. The reason behind foreign
companies making a beeline to enter the insurance business in the country is pretty
Obvious Insurance in India is only 3.14 per cent of its GDP compared with the
global average of 7.52 per cent. This means a vast majority of Indian population is
left to be covered by insurance.

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 GLOBALISATION AND LIFE INSURANCE

Structure:

Globalization and Liberalization.

Globalization of Insurance Market.

Impact of Liberalization on Economic growth.

Growth of Life Insurance in India

Managing in the face of Globalization.

Globalization and Liberalization

Globalization can be defined as the movement of goods, services and resources

across borders which have a major impact on the domestic and global assets and
employment. The major gateway of globalization and financial liberation is
economic liberalization which plays a major role in the integration of country’s
economy on the global economic network. For a successful global integration a
country must move to economic liberalization by dismantling entry barriers and
Licensing system, reduction in physical restrictions on imports, reduction in
control on capital and current account, reforming financial system and opening up
financial market to private players. The major drivers of globalization are
expansion of International Trade, Internationalization of financial market and
Migration, Investment, Factor prices, Capital flows and markets and
Industrialization.

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Financial Globalization
The process of Globalization is strongly supported by Financial Globalization.
There is an inextricable relation between increased international trade in goods and
services and the increased flow of international capital. It is because increased
trade is followed by increase in payments, banking service, hedging etc. The major
benefits of financial globalization are as follows:

Globalization produces higher economic growth through direct and indirect

impact on economy.
Liberalization and globalization produces immense benefits to the countries
integrated.
Economic integration through liberalisation can also expand job
opportunities in domestic market and through migration of labour in
general.
Financial Liberalization has forced many countries to open up financial markets
and relaxed the rules of intermediation allowing financial services institutions like
investment. Banks, asset management companies, Mutual Funds, Pension Funds
etc, to operate in newly liberalized markets.

Impact of Liberalization on Economic growth

Liberalization of capital markets attracts foreign investment which influences the

price of equity thereby reducing the cost of capital. Financial liberalization also
imparts structural formats of capital markets, improves the disclosures,
transparency and corporate governance which creates growth prospects in a
liberalized country.

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Growth of Life Insurance in India

Growth in Life Fund is considered to be an important indicator of growth of Life

Insurance Industry. High growth of Life Fund and Assets of LIC was possible due
to significant growth in New Business, which got a boost during the Post
Liberalization period.

Managing in the face of Globalization

The primary challenge before Indian Life and Non-life Insurance Industry is to
improve penetration level within a five years time frame at least up to world level,
if not to the level of countries with equal growth rate. Now, it is the responsibility
of Indian Insurance companies to mobilize funds from the savings market through
their marketing initiatives and performance. Continuous innovation in financial
services has been creating ever growing demand for new skills to suit the
organizational requirements.

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