Jour of Adv Research in Dynamical & Control Systems, 05-Special Issue, July 2017

Lapsation of Life Insurance Policies

S. Subashini, Ph.D. (FT) Research Scholar, Management, Karpagam University, Karpagam Academy of Higher Education,
Coimbatore.
Dr.R. Velmurugan, Associate Professor, Commerce, Karpagam University, Karpagam Academy of Higher Education,
Coimbatore.
Abstract--- Life insurance occupies an important position in the financial sector of an economy. It contributes to
economic development through risk management, protection of risks, and mobilization of savings leading to capital
formation in the country.The insurance sector is a colossal one and is growing at a speedy rate of 15-20 per cent.
Together with banking services, insurance services add about 7% to the country’s GDP. Insurance industry has been
facing problem of high lapsation ratios in past few years. Lapsation is an issue faced in countries all over the
globe.From the study, it is inferred that main reasons for Lapsation are product mis-matches, due to wrong selling,
mis-selling or forced selling by advisors or lack of understanding of the product by policyholder.
Keywords--- Life Insurance, Lapsation, Mis-selling.

I. Introduction
Life insurance industry is losing policyholders on one hand, and trapping new ones on the other. It is a long-term
contract. Lapsation of life insurance policies is the one of the major problems prevailing in the industry. It is
primarily caused as the result of policyholders surrendering their policies in between the tenure of the policy. This is
largely caused by poor sales practices followed by the insurance industry. Poor persistency is mainly on account of
lapses. A lapse occurs at the point of sale when a policy is mis-sold or bought with poor understanding. Lapsation
means that an insurance policy ceases to exist. A policy lapses if the policyholder fails to pay premium after a
stipulated grace period of 30 days for a policy. When policyholders miss their premium payments, they are no
longer protected under the insurance. If the policyholder dies, the nominee will not be able to avail the claim, as the
policy had lapsed and there was no risk cover. Salunke 1997 observed that absence of need-based selling and lack of
after-sales services were the important reasons for the policy lapse. At present least 20% of the renewal premium
loss is accounted for by premiums that do not return due to maturing, policies where death benefit has been paid out
and policies discontinued due to an income shock to the policyholder. Eighty per cent of the lost premium is
lapsation due to mis-selling. This means that Rs.1.56 trillion was lost due to lapsation linked to mis-selling of
insurance over 2004-05 to 2013-14 (Source: Goldman Sachs report, 2013).

II. Review of Literature

Chaudhary and Kiran (2011) observes that lapsation ratio of private insurers was higher than LIC and servicing
of death claim was better in case of LIC as compared to private life insurers. Rajasekhar (2008) finds 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. Prabharara. G
(2007) informs that allowing grace period to the policyholder for payment of installment premium after the due date,
during which the policy remains in force. Anil Chandhok and Mittal (2004) revealed that agent’s recommendation
of apt policies to the clients by understanding their basic needs influence the level of satisfaction and enable them to
keep the policy in force. Salunke (1997) analysed the problems of insurance policy lapse in LIC of India. He
observed that absence of need-based selling and lack of after-sales services were the important reasons for the policy
lapse.

III. 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 Insurance Regulatory and
Development Authority of India (IRDA), life insurers 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 policyholder to the insurer results in 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://globenews

ISSN 1943-023X 33
Jour of Adv Research in Dynamical & Control Systems, 05-Special Issue, July 2017

wire.com/news-release/2015). In India investors lost 1.5 trillion due to insurance lapsation (www. Business
standard.com). Hence, the present study has been carried out to identify the reasons for lapsation of insurance
policies in both public and private sectors and to suggest suitable measures to bring down the lapsation rate.

IV. Objective of the Study

To know the reasons for the lapsation in life insurance policies

V. Research Methodology
Data
Data required for the study is primary in nature. Thus primary data is collected by making use of questionnaire.
Questions pertaining to lapsation of the insurance policies are included in the questionnaire.
Sample Design
By adopting purposive sampling method questionnaire are distributed to 300 policyholders.

VI. Analysis and Interpretation

To identify the prominent factor that leads to policy lapsation, Factor Analysis is employed. The following table
illustrates the significant reasons that lead to policy lapsation. Kaiser-Meyer-Olkin (KMO) and Bartlett’s Test of
Sphericity has been used as pre-analysis testing for 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 sphercity test (903.664, df: 210, Sig=0.000) amd KMO statistics (0.752)
indicated the appropriateness of factor analysis i.e., the sample was adequate.
KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .752
Bartlett's Test of Sphericity Approx. Chi-Square 903.664
df 210
Sig. .000

Table 1: Causes of Lapsation-Factor Analysis

Factors 1 2 3 4 5 6 7 8 9
Limited benefit in the product 0.069 -0.034 0.012 -0.037 0.015 0.191 0.828 -0.045 -0.045
High Premium Rate 0.151 -0.096 0.023 -0.182 0.749 0.032 -0.011 0.089 -0.155
Poor Customer Service -0.144 -0.417 0.021 -0.452 -0.145 -0.376 0.271 -0.157 -0.052
Mis-selling of the Product 0.119 0.078 -0.245 0.036 0.097 0.011 0.089 -0.616 -0.038
Delay in Renewal Notice 0.106 -0.312 0.137 0.311 -0.104 0.133 0.190 0.219 0.545
Improper Training to the Agents 0.099 0.111 -0.086 -0.141 0.014 -0.115 -0.037 0.017 0.795
Lack of faith about company’s past performance -0.009 -0.010 0.036 0.807 -0.034 0.014 -0.048 -0.117 -0.069
Previous experience about delay in claim settlement -0.061 -0.275 -0.112 0.072 -0.082 0.353 -0.514 0.023 -0.209
Low awareness about protection of life -0.228 0.226 0.493 -0.313 0.321 0.107 -0.169 -0.078 0.223
Complex revival procedures -0.100 -0.032 -0.031 0.368 0.659 -0.150 0.144 -0.041 0.120
Poor rapport with the customers -0.027 0.058 -0.058 0.052 -0.078 0.841 0.157 -0.047 -0.088
Financial burden for the policyholders 0.112 0.585 0.327 -0.139 -0.031 -0.002 0.095 0.026 -0.125
Loss of Customer confidence due to bad word of
-0.098 0.681 -0.080 -0.015 -0.148 0.126 0.103 0.013 0.112
mouth from others
Frequent change of customer address -0.684 0.067 -0.341 0.002 -0.002 0.019 0.107 0.089 -0.118
Wrong prospecting of customers 0.844 -0.054 -0.045 0.022 0.074 0.010 0.136 0.110 0.061
No transparency in the procedures 0.261 0.009 -0.331 -0.021 0.215 0.011 -0.007 0.707 0.152
Inadequate skill of employees -0.309 0.396 0.189 -0.190 0.103 -0.047 0.088 0.482 -0.128
Low bonus declaration 0.062 0.006 0.826 0.106 -0.021 -0.079 0.102 0.124 -0.069
Procrastination in paying premium 0.097 -0.169 0.077 -0.187 0.399 0.429 -0.281 0.039 0.226
Agent force to cancel existing policy and make to
-0.242 0.593 -0.067 0.243 -0.019 -0.223 -0.129 -0.107 0.001
purchase another new policy
Customer feel it is useless investment 0.847 -0.050 -0.138 -0.008 0.020 0.017 0.048 -0.072 0.004
Eigen Values 2.661 1.848 1.601 1.498 1.292 1.252 1.170 1.151 1.003
% of Variance Explained 12.670 8.802 7.623 7.133 6.154 5.963 5.573 5.480 4.777
Cumulative % of Variance 12.670 21.472 29.094 36.227 42.381 48.344 53.918 59.398 64.175

ISSN 1943-023X 34
Jour of Adv Research in Dynamical & Control Systems, 05-Special Issue, July 2017

Nine factors are identified by locating Eigen values greater than unity. Reasons which have a component loading
of 0.5 and above are said to be significant reasons that lead to lapsation. From the rotated component matrix it can
be seen that “Customer feel it is useless investment” and “Wrong prospecting of customers” have a component
loading of 0.5 and above. Hence, these two variables form first factor.
In the second factor, “Loss of Customer confidence due to bad word of mouth from others”, “Agent force to
cancel existing policy and make to purchase another new policy” and “Financial burden for the policyholders” are
found to be significant.
In the third factor, “Low bonus declaration” is found to be significant.
In the fourth factor, “Lack of faith about company’s past performance” is found to be significant.
In the fifth factor, “High Premium Rate” and “Complex revival procedures” are found to be significant.
In the sixth factor, “Poor rapport with the customers” is found to be significant.
In the seventh factor, “Limited benefit in the product” is found to be significant.
In the eighth factor, “No transparency in the procedures” is found to be significant.
In the ninth factor, “Improper Training to the Agents” and “Delay in Renewal Notice” are found to be
significant.
Factor one contributes to a tune of 12.67 per cent towards policy lapsation. The other factor contributes namely,
8.80, 7.62, 7.13, 6.15, 5.96, 5.57, 5.48 and 4.78 towards policyholder lapsation in their order. The total cumulative
percentage of factors by these nine factors towards lapsation is 64.17 per cent.

VII. Suggestions
The main reason for lapsation is found that majority of policyholders perceive that Life Insurance Policy as
useless form of investment. Hence, it is duty of agents and development officers to inform about the benefits of
availing insurance policies in the midst of layman policyholders.
In the event of loss of customer confidence due to bad word of mouth from others, the insurance agents act
honestly, in carrying out business, introduce latest Information Technology solutions for minimizing cost, enhancing
productivity and improving servicing standards.
The expectation of policyholders on the bonus rates may no longer be attractive and hence it is also one of the
reasons for the lapsation, to address this problem the insurance companies can design the products with attractive
bonus rates and provide consistent income to the policyholders to make them stay longer with the company.
To avoid the complex revival procedures the insurance companies should also concentrate their efforts on taking
up revival initiatives to persuade policyholders whose policies are in a lapsed condition and provide premium
discount or bonuses for the revival of the lapsed policies.
Insurers should create trust and confidence by avoiding mis-selling, offering better services and should provide
simple, transparent and fair process to increase faith among policyholders. The use of technology and developing
innovative products will help to create better customer service to the policyholders.
In order to have transparency, the policy 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.
The insurance companies should provide high standards and professionalism in all transactions and recognize
and respect the rights and interests of policyholders.
The agent's responsibilities to the policyholder are not over with the closingof the sale. It is essential to have
After-Sales Service and they should be in continuous touch with them to ensure that premiums on their policies are
paid as and when they fall due.

VIII. Conclusion
The insurance companies have to work and concentrate on time-based competition, quality, product range,
timely advertisement, follow up, prompt and error-free services which are the key ingredients for the better service
and it will boost up the sales. Policyholders of life insurance policies seek personalized services and constant

ISSN 1943-023X 35
Jour of Adv Research in Dynamical & Control Systems, 05-Special Issue, July 2017

support in financial planning e.g. flexible payment schedule, flexible product solution, provisions for convertibility
of products and supplementary services etc., The major suggestions to bring down the lapsation are that insurers
should provide clear and transparent services, IRDA should be made mandatory insisting the insurers to send
renewal notices. The lapsation of policies in life insurance sector is creating obstacles to the growth of the entire
industry. Lapsation can be controlled by an insightful mix of proactive (P) and reactive (R) measures. The proactive
measures can help reduce instances of lapsation whereas the reactive measures can help reinstate the lapsed policies.
Hence, it to be understood that there is a need for the marketers to convey the information about policy dues to the
customers.

References
[1] Chaudhary, S. and Kiran, P. Life Insurance Industry in India-Current Scenario. International Journal of
Management & Business Studies 1 (30) (2011) 146-150.
[2] Rajasekhar. Lapsation of Life Insurance policies. IRDA Journal 6 (8) (2008) 13-17.
[3] Prabharara, G. Grace period given to the policy holders. IRDA Journal (2007).
[4] Anil Chandhok. and Mittal, R.K. Critical Study of First Year Lapsation Ratio of Life insurance Business.
Insurance Chronicle 4 (9) (2004) 76-79.
[5] Salunke, J.S. Paradigm Shift: On the Dynamics of Quality and Profitability. Yogakshema 15 (1) (1997)
1-18.

ISSN 1943-023X 36