Anatomy of a Cancelled Life Insurance Contract

Why are contracts through banking channels often canceled?

The most common reasons for life insurance contract cancellations are reluctance to participate and/or the inability to continue the contract. But looking deeper, the root of the problem lies in the market development of insurance companies, which depends on the main product group: investment-linked insurance. Data for 2022 shows that up to 85% of new premiums are from this product line.

As in other emerging economies , investment-linked products are rapidly replacing traditional pure protection or combined protection and accumulation products. The rapid growth of this product line, especially distribution through banking channels (bancassurance), has forced some markets such as India, Hong Kong, Indonesia, and Malaysia to issue new regulations and regulate the market.

Normally, banks require borrowers to have an insurance contract to ensure that in case of unfortunate risks, the bank can recover the loan amount. And in this case, a contract that purely protects against risks is enough, for example, a term life insurance contract or an extended term life insurance contract with risks of illness and accidents.

The persistence ratio should also be considered an important indicator to evaluate the effectiveness of insurance companies, and this indicator should be communicated to the public annually.

However, due to business targets, banks want to collect the most insurance premiums in the first year, so customers will be "oriented" to participate in investment-linked products. If customers are knowledgeable and refuse, participating in an insurance contract is a soft condition for loan approval or a more favorable interest rate.

Because of reluctance to participate or participation with a higher premium than necessary due to additional investment, the possibility of not continuing to implement the contract is very high in the following year and the years after. However, the consequences of early contract cancellation are not fully seen by many people.

Early contract termination: loss for customers, businesses, and the market

The most obvious thing when a life insurance contract is canceled early is the customer's loss. Because the earlier the cancellation, the more costs are accumulated for this period instead of being spread out. For example, a 30-year contract, if maintained until maturity, costs such as exploitation commissions, application fees, health checks, etc. will be divided into small amounts, but if canceled after only 1-2 years, these costs must be charged to the customer at once. This is also the reason why many life insurance contracts do not have a surrender value (surrender value) in the first two years.

However, early contract cancellation is not only a loss for customers but also for the insurance company itself. When a contract is cancelled, it also means that the premium revenue for the following year will no longer exist, affecting the total revenue, cash flow and investment activities of the company. For example, early contract cancellation can affect the investment plan of the company, or worse, the company has to liquidate some investment before the due date to pay customers. A company with a high rate of contract cancellation will be affected in terms of reputation and prestige, and will have more difficulty in developing the market.

From the overall market perspective, a high cancellation rate will reduce the confidence of current customers, which may increase the cancellation situation. Future customers may also be more reserved and underinsured, leading to the role of life insurance as a risk prevention tool and a capital channel for the economy being lowered compared to its role and capacity.

Can it be cured?

Some emerging markets have also experienced a period of rapid growth in investment-linked insurance products, and they have made changes to regulate the market. Supervision of a financial service product provided by a bank requires unified management between the financial management agency ( Ministry of Finance ) and the banking management agency (State Bank). In this case, the responsibility of banks introducing and providing insurance products must be associated with transparency and equality. Specifically, it must be based on needs, capabilities, and ensure that customers clearly understand their obligations and rights in the contract.

The most common reasons for life insurance contract cancellation are reluctance to participate and/or lack of financial capacity to continue implementing the contract. But looking deeper, the root of the problem lies in the market development of insurance companies depending on the main product group: investment-linked insurance.

The persistence ratio should also be considered an important indicator of the effectiveness of insurance companies, and this indicator should be communicated to the public annually. The retention rate should be reported for the first five years so that the market and consumers know which companies have good retention rates, over a long enough period of time.

Finally, a factor that greatly affects contract cancellation is the relationship between the customer and the insurance agent. Agents who have been in the profession for a long time and consider this their main job have a much higher contract retention rate than agents who have only been in business for a short time. Therefore, the quality of input and the preferential policies for agents with seniority are things that insurance companies need to prioritize.

There are many countries where the life insurance contract retention rate is very high (over 99%) such as the Nordic countries. In addition to reasons such as high awareness and understanding of life insurance among the people, the rights of insurance participants are also very strictly protected. Insurance companies or intermediaries will not dare to take the risk of being ambiguous in introducing and providing life insurance products.

Only then will people fully understand the role of life insurance, the diversity of life insurance products, and they will proactively participate after consulting with responsible and certified agents.

Source thesaigontimes

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