Persistency rate

What Is Persistency Rate?

Persistency rate, a core metric in insurance and risk management, measures the percentage of policies or contracts that remain in force over a specified period without lapsing, surrendering, or terminating. It serves as a vital indicator of an insurer's or financial institution's customer retention and the stability of its revenue stream. A high persistency rate generally reflects strong policyholder satisfaction and effective policy management, indicating that policyholders are continuing to pay their required premiums. For insurance companies, maintaining a high persistency rate is fundamental to their long-term profitability and business sustainability.

History and Origin

The concept of persistency has been integral to the insurance industry since its inception, evolving as insurance contracts became more complex and long-term. Early forms of insurance, particularly life insurance, inherently relied on the continuous payment of premiums to remain viable. As the industry matured, particularly in the 20th century, and the volume of policies grew, insurers recognized the critical need to systematically track how long policies remained active. This led to the formalization of persistency rate calculations, becoming a key actuarial and business performance metric. The development of regulatory frameworks, such as those overseen by the National Association of Insurance Commissioners (NAIC) in the United States, further emphasized the importance of monitoring persistency to ensure financial solvency and fair practices within the industry. Disputes and legal interpretations have also highlighted the significance of how persistency is calculated and reported, influencing industry standards and disclosures. For instance, court cases in jurisdictions like Singapore have addressed the factual accuracy and methodologies used for calculating persistency ratios, underscoring their legal and financial implications.⁴

Key Takeaways

• The persistency rate quantifies the proportion of insurance policies that remain active over a defined period, reflecting policyholder retention.
• It is a crucial indicator of an insurer's financial health, customer satisfaction, and operational efficiency.
• Higher persistency rates contribute to predictable revenue, lower acquisition costs, and enhanced profitability for insurance companies.
• Factors influencing persistency include product design, customer service quality, economic conditions, and the effectiveness of sales and post-sale engagement.
• Regulators and industry bodies monitor persistency rates as part of their oversight functions to ensure market stability and consumer protection.

Formula and Calculation

The persistency rate is typically calculated as the ratio of policies remaining in force at the end of a period to the policies in force at the beginning of that period. It can be expressed as a percentage:

• Number of Policies In Force After a Defined Period: This represents the count of policies for which premium payments have been received and are active at the end of the chosen interval (e.g., 13 months, 25 months, 61 months).
• Number of Policies In Force at the Start of the Period: This refers to the initial count of policyholders who held active policies at the beginning of the measurement period.

This calculation can be refined to consider premium volume rather than just policy count, or segmented by policy type, distribution channel, or other demographic factors to provide more granular insights.

Interpreting the Persistency Rate

Interpreting the persistency rate involves understanding its implications for an insurer's operations and financial outlook. A consistently high persistency rate suggests that policyholders perceive significant value in their coverage, are satisfied with the insurer's service, and are able to meet their financial commitments. This indicates strong customer satisfaction and effective product design. Conversely, a low or declining persistency rate can signal underlying issues such as dissatisfaction with customer service, policies not meeting evolving needs, aggressive sales practices leading to unsuitable policies, or affordability challenges faced by policyholders. From a risk management perspective, a stable and high persistency rate allows insurers to more accurately predict future cash flows and manage their liabilities effectively.

Hypothetical Example

Consider "Horizon Life Insurance," which launched a new term life insurance product. On January 1, 2024, they had 10,000 active policies for this product. By January 1, 2025, 8,500 of these policies were still active, with policyholders continuing their premium payments.

To calculate the 13-month persistency rate:

This indicates that 85% of the original policyholders remained with Horizon Life Insurance for at least 13 months. If Horizon's internal target was 90% for this period, or if industry benchmarks for similar products typically show 92%, an 85% rate would suggest areas for improvement. Horizon Life might then investigate reasons for policy discontinuation, such as changes in policyholders' financial goals or issues within the early stages of the policy lifecycle that led to cancellations.

Practical Applications

The persistency rate is a critical metric across various aspects of the insurance and financial services industries:

• Financial Planning and Forecasting: Insurers use persistency rates to forecast future premium income, projected claims, and overall financial performance. Accurate projections enable better capital allocation and solvency management.
• Product Development and Pricing: Understanding which products exhibit higher persistency helps actuaries and product developers design more attractive and sustainable offerings. Persistency assumptions are integral to the underwriting process and setting appropriate premiums.
• Sales and Distribution Management: Sales channels and individual agents are often evaluated based on the persistency of policies they sell. High persistency among an agent's client base suggests quality sales and proper client education, aligning with long-term customer retention goals.
• Regulatory Compliance: Insurance regulators often monitor persistency rates to assess market conduct and ensure that policies are being sold responsibly and are providing long-term value to consumers. The Society of Actuaries (SOA), for example, conducts extensive studies on universal life premium persistency and lapse rates, providing valuable industry insights for both companies and regulators.³
• Customer Relationship Management: Insurers actively manage persistency by engaging with policyholders through communication, service enhancements, and loyalty programs to improve their retention rates, especially in competitive markets where customer loyalty impacts market competition. Strategies such as automated reminders and predictive analytics are increasingly employed to support timely renewals.²

Limitations and Criticisms

While highly valuable, the persistency rate has its limitations and faces certain criticisms:

• Varying Definitions: There is no single, universally standardized method for calculating persistency rates across all insurers or jurisdictions, which can make direct comparisons challenging. Different calculations might include or exclude certain types of terminations or measure at different intervals.
• External Factors: Persistency can be significantly impacted by external factors beyond an insurer's control, such as broad economic conditions, interest rate fluctuations, or changes in unemployment rates. During periods of economic downturn, policyholders may struggle with premium payments, leading to lower persistency despite an insurer's best efforts.
• Misleading Interpretation: A high persistency rate alone does not guarantee a profitable product if the initial pricing or expense structure is poor. Conversely, a low persistency rate might not always indicate poor performance if the policies are intentionally designed for shorter terms or specific purposes.
• Cross-Subsidies and Policy Design: Critics argue that some policy designs, particularly those with front-loaded fees, may inadvertently encourage policyholders to lapse, leading to high termination rates and potentially creating cross-subsidies from lapsing policyholders to those who persist. This issue can raise concerns about consumer fairness and the overall value proposition for certain insurance products.¹ Addressing such concerns requires regulatory scrutiny and careful consideration of policyholder financial stability and understanding.

Persistency Rate vs. Lapse Rate

Persistency rate and lapse rate are two sides of the same coin, both measuring the retention of insurance policies, but from opposite perspectives.

The persistency rate quantifies the percentage of policies that remain in force or continue to be active over a given period. It focuses on continuity and retention. For example, an 85% persistency rate means that 85 out of every 100 policies are still active.

In contrast, the lapse rate measures the percentage of policies that terminate or are discontinued (either through non-payment of premiums or surrender) over a specified period. It focuses on attrition. If the persistency rate is 85%, then the lapse rate for the same period would be 15% (100% - 85%).

Confusion often arises because both metrics address policy retention. However, financial professionals typically discuss persistency when emphasizing policy stability and customer loyalty, while lapse rate is used when analyzing policy terminations and their causes. Understanding both is crucial for a complete picture of an insurance portfolio's health.

FAQs

Why is persistency rate important for insurance companies?

A high persistency rate is vital for insurance companies because it ensures a stable and predictable flow of premium payments, which are crucial for meeting future claims and operating expenses. It also reduces the costly process of acquiring new customers, contributing directly to an insurer's profitability.

How do external factors impact persistency?

External factors such as economic recessions, rising unemployment, or sudden changes in interest rates can significantly affect persistency. During financial hardship, policyholders may be forced to discontinue their policies, leading to a decrease in the overall customer retention rates for insurers.

What is a good persistency rate?

What constitutes a "good" persistency rate can vary by product type, market, and the duration measured (e.g., 13-month vs. 61-month persistency). However, generally, higher rates are always preferred. Many regulators and industry benchmarks exist to help insurers assess their performance. For instance, in some markets, a 61st-month persistency rate of 60-70% might be considered acceptable, though companies often strive for much higher.

Who calculates persistency rates?

Actuarial science departments within insurance companies are primarily responsible for calculating and analyzing persistency rates. These calculations are often used by financial analysts, product development teams, and sales management to monitor performance and inform strategic decisions. Regulators also review these rates as part of their oversight.

Can persistency rate be improved?

Yes, persistency rates can be improved through various strategies, including enhancing customer service, offering flexible payment options, providing clear communication about policy benefits, and designing products that truly meet policyholder needs. Proactive engagement, such as automated reminders and personalized communication, also plays a significant role in encouraging policy renewals.