India's life insurance industry has reported a persistency ratio of 47% in the 61st month for the financial year ended 31 March 2019 (FY19). This means that less than half of life policies continue into the sixth year.

Based on the number of policies renewed, life insurance giant LIC's 61st month persistency ratio was 51%, reported Hindu Business Line. Many privately held life insurers reported a persistency ratio of less than 40% for FY19 in the 61st month, data compiled by BusinessLine reveal.

One reason for the policy lapses could be mis-selling, say experts.

Given that most of the business for life insurers is from traditional policies (endowment plans) and costs are front-loaded in these products, early exits mean customers don’t even get their full capital back.

The incentives for insurance agents and distributors are designed in such a way that they make more when customers surrender their existing policy and buy a new one, said an agent with a private insurer. For traditional policies, the commissions are 35-45% in the first year and 4-7% from the second year onwards.

The IRDAI, however, does not subscribe to the argument that lower persistency ratios are due to mis-selling.

“Premature surrender of policies could be due to financial exigencies or because the customer wants to take advantage of market gains in the case of unit-linked products. It may not be entirely correct to equate policy lapses with mis-selling,” said an IRDAI spokesperson.