The life insurance industry is seeing a sharp rise in policy lapses as subscribers are not paying renewal premiums on time.

"The rate of policy lapses in the country has increased more than three-fold in the last three years ” this is the highest since the industry was opened to private players in 2000-01.

Industry-wide data available from the Insurance Regulatory and Development Authority (IRDA) and the Life Insurance Council revealed that the retention ratio which was at 95 percent in 2002-03 had declined to about 83 percent in the year ended March 2009 (See chart).

A decline in the retention ratio means an increase in the policy lapse ratio.

While the retention ratio fell 2.5 percentage points to 92.51 percent by 2005-06 from 95 percent in 2002-03, between 2006-07 and 2008-09 it declined nearly 10 percentage points to 82.96 percent. Besides, the lapse ratio had increased significantly in 2008-09 compared with the previous years.

A large part of the rise in the lapse rate is attributed to the introduction of unit-linked insurance plans (Ulips) and their mis-selling. Currently, more than 75 percent of all life insurance policies sold in the country are Ulips.