By Blaise Kendah
The number of policies in a life insurance company is subject to natural erosion such as deaths and maturities, in addition to this natural erosion, we observe in our market another type of erosion not insignificant, it is policy falls prematurely, these policy falls are generally observed during
first years of the life of the contract.
By definition, we are talking about a fall in the life insurance policy when we observe a stoppage of contribution payments after observing a grace period of at least 40 days in our market.
According to article 73 of the CIMA Insurance Code, the insurer must inform the contractor by registered letter, by which he informs that at the end of a period of forty days from the sending of this letter failure to pay results in either the termination of the contract in the event of non-existence or insufficiency of the redemption value, or the reduction of the
contract.
A contract is entitled to a surrender value if the insured pays at least 24 months of contributions or 15% of the total contributions of the contract (Article 74 of the CIMA Insurance Code). It is important to note that the insured has the option to reinstate his / her contract after being notified by the insurer of the cessation of contributions. The reinstatement policy
depends on the underwriting policy of each insurer.
We note three types of font fall:
- Falls of type I policies, these are the falls of policies recorded in the first year of contributions, that is to say, 1st month in the 12th month; (Most observed type on the market)
- Type II policy falls, these are the types of contributions recorded between the 13th month and the 23rd month of contributions;
- Falling type III policies, these are bought-back contracts.
NB: Cancellations / refunds are not considered as falling fonts.
The impact of falling fonts
The main actors in the marketing of a life insurance product are: the insured, the insurer (the company) and the intermediaries, for various reasons. The primary role of the insured is the payment of contributions in order to benefit from future benefits,
the role of the insurer is to guarantee the payment of future benefits while the role of the intermediary is to bring the prospect / insured to the insurer.
A little further down, we will present the reasons why we believe that policy falls have a major impact on the key players mentioned above.
However, there are factors that are also impacted by the drop in policies, this is the company in general, the government and the tariff parameters such as the acquisition and management fees, the mortality and the death rate. ‘interest.
Below, the different reasons why these actors or factors are impacted by the falls of the policies.
The insured
a. Loss of valuable protection: With the cessation of payment of contributions, the insured loses all the guarantees subscribed. Because according to Article 73 of CA CIMA, when a premium or a fraction of premium is not paid within ten days of its expiry, the insurer sends the contractor a registered letter, informing him that at the end of a period of forty days from the sending of this letter the lack of payment entails the termination of the contract in case of non-existence or insufficiency
of the surrender value, or the reduction of the contract.
b. Loss of initial premiums: When policies fall, initial premiums are lost if there is no or insufficient cash value.
c. Loss of Savings: Section 73 of CA CIMA mentioned above states that in the event of a policy crash we have two options, that is, the policy is terminated as a result of the loss of the original premiums (ie Savings) or the contract is reduced, and in this case the insured receives only a fraction of the contributions to date.
The insurer
a. Braking future profits: The fall in policies leads to the reduction of contributions and consequently the reduction of the mathematical reserves which leads to a brake on future returns on investment.
b. Loss of initial subscription expenses: Costs incurred by life insurance companies when subscribing to new business are generally very high, including commissions, administrative expenses, communication, marketing, etc., and therefore premature and abusive falls in policies usually result in the insurer not recovering these expenses.
c. Unproductive Efforts: The insurer makes a lot of effort on new business that dies before it has the opportunity to recover the original expenses or charges.
d. Poor image due to bad publicity by disgruntled policyholders: The majority of policyholders who do not receive a cash surrender value following the termination of their contract, generally accuses insurers of unduly benefiting from their initial contributions. And therefore discourages their entourage to subscribe to a life insurance policy.
e. Work organization: The fall of life insurance policies in life companies usually leads to a new organization of work, either by creating a new collection service, or by setting up new subscription procedures etc ….
Intermediate
a. Declining revenues: The fall in policies leads to a fall in production and consequently lower commissions (income) for intermediaries.
b. Unproductive Efforts: Intermediaries provide a lot of energy for unstable business and therefore are not always rewarded for their efforts.
The society
Dependence on financial assistance from friends or relatives: The fall of policies leads to the loss of collateral as mentioned above and therefore, in case of disasters, people who have lost their insurance coverage or their beneficiaries are literally dependent on friends or family.
The economy
Financing the economy: the fall in policies leads to the reduction of the turnover of life companies as well as the reduction of their provision and consequently reduces their contribution in the financing of financial structures and the economy in general.
Falling fonts: The causes
In our presentation, we identified several causes of premature falls in life insurance policies. There are external causes and internal causes.
External Causes
- Socio-economic class of the insured
- Availability of other investment options
- Specific characters of the insured
❖ Wealth and savings
❖ Education
❖ Age
❖ Gender (less for women)
❖ Urban or rural rental (More in rural areas)
❖ Available capital (More for low capital insured)
Macroeconomic factors
❖ Available income
❖ Government policies on taxes
❖ Economic development of the country.
All of these factors are beyond the control and influence of life insurance companies. But the internal factors below are controllable and influential by them.
Internal causes
- Insurance product design
❖ Types of products (More drop on mixed products)
❖ Frequency of contributions (No more drops for monthly contributions)
❖ Contract durations (More falls for long duration products)
❖ Method of payment (no more drop in cash contributions). - Marketing and personal strategies
❖ Activity planning
❖ Education of the commercial team (commercial agent, commercial executives,
marketing, career profile …)
❖ Customer Education
❖ Market study
❖ Recruitment, training and mode of remuneration of commercial
Falling fonts: Costs
In some companies in the market, there are policy falls on some products of around 50% over the first two years of contributions. Applying this drop rate on a large scale inevitably leads to huge financial losses for our market.
These rates are very high compared to international standards that are less than 10% in the first year.
fonts
This table illustrates the fact that this company lost half a billion in 5 years on the production of new business of the year N.
Conclusion / Suggestions
The premature massive erosion of life insurance contracts combined with the high cost of acquiring underwriting contracts is a drag on the growth and stability of life companies in our CIMA sub-region.
In this document, we have limited ourselves to observations and real facts of a general nature and our experience in the management of the different portfolios. A deeper analysis should be conducted on the exact cost of policy falls and the actual impact on the various factors / actors involved in the management of a contract, in order to allow us to answer the questions below:
❖ The impact on the profitability of a life insurance company following the fall of the policies
❖ The impact of the fall of the policies on the rate in life insurance
❖ The emergence of profits following the fall of the fonts
❖ Falling fonts
• Cumulative annual loss of contributions in the CIMA zone
• Annual unrecoverable costs in the CIMA zone
• Lost opportunities and financial losses in the CIMA zone.
Below are some general suggestions to improve the persistence of life insurance policies.
❖ Education of populations on the importance of insurance (Insurance Companies and Government)
❖ Avoid mass recruitment of agents
❖ Continue the relationship with the insured after the sale and after the services
❖ Know your client, understand their needs
❖ Design products tailored to the needs of insureds
❖ Pre-recruitment training followed by a test and interview for salespeople (career profit).
We all have an important role to play in the persistence of insurance policies:
Insurers, Intermediaries, Fanaf, CIMA and governments (Via DNA).