New government data for FY 2024-25 shows a sharp drop in life insurance policy renewals by the fifth year. While most policies remain active initially, retention declines significantly over time. The regulator, IRDAI, is now pushing insurance companies to curb mis-selling and improve long-term customer engagement.
Data released for the 2024-25 fiscal year reveals a concerning trend in the Indian life insurance sector, where a large number of policies are not being renewed. While insurance companies see relatively high activity in the first year, with 60% to 83% of policyholders continuing their plans, this figure falls sharply to between 22% and 59% by the fifth year. This drop-off indicates that a substantial portion of customers discontinue their life cover, often losing the benefits they initially sought.
The Insurance Regulatory and Development Authority of India (IRDAI) is actively tracking these renewal rates, particularly at the 13-month and 61-month marks. The regulator has directed insurance firms to prioritize long-term policy retention and take stronger steps to prevent mis-selling. Mis-selling, where policies are sold without considering the customer's actual financial needs or long-term capability to pay premiums, is a major factor often blamed for early policy exits.
Minister of State for Finance Pankaj Chaudhary noted that several factors contribute to these lapses. Beyond the suitability of the product sold, financial strain on households and changes in a policyholder's economic situation play a major role. When premiums become unaffordable or when the policy does not align with a family's financial goals, customers are more likely to stop payments.
To help prevent these lapses, the regulator has pushed for more flexible support mechanisms. Insurers are now required to provide loan facilities against life insurance savings products that have reached a surrender value. This allows policyholders to access cash for immediate needs rather than canceling the entire policy. Furthermore, insurers must adhere to mandatory grace periods of 15 to 30 days for premium payments, ensuring that a temporary delay in payment does not immediately void the coverage.
For investors, this trend highlights the pressure on insurance companies to maintain higher quality in their sales channels and provide better customer service. Companies that rely heavily on aggressive, short-term sales tactics may face increased regulatory scrutiny and higher operational costs to fix retention issues. The next important monitorable will be how individual insurance companies report their persistency ratios in upcoming annual reports and whether these regulatory mandates successfully stabilize long-term policy continuation.