Renshaw and Haberman (1986) find an additional significant interaction between policy type and duration of policy, meaning that the lapse rate
depends not only on single factors but also on the combination of factors.
The lapse rate
on life policies has traditionally been one of the central parameters in the managerial framework for life insurers.
The elasticity of the lapse rate
with respect to the health bonus-malus coefficient is negative as expected and very significant (the limit level in a test for nullity is negligible).
For a block of term policies that is entering the post-level period, if one is working from a previous assumption where premium rates and ongoing cumulative lapse rates
are relatively high, discussion of lowering premiums to increase persistency certainly makes sense.
They estimate an error-correction model with two cointegrating vectors of the lapse rate
The Payoff: An ultra-low lapse rate
is often a mark of an insurer with excellent operational results.
To examine the incremental effect of lapsing, all lapse rates
were kept at their benchmark levels and all price and risk elasticities were set at zero.
Conversely, if lapse rates
in ultimate durations are less than were assumed in the pricing process, the profitability of the product will suffer.
Understanding the dynamics of the lapse rate
is important to insurance companies.
results are summarized in Panel C of Table 4.
Because mutuals work on the basis of dividends, they have lower lapse rates
, according to Wagner.
Although Fidelity Life has been profitable over the past five years, experience profits were negative in 2009, mainly due to the higher than expected lapse rate
and unfavorable claim experience from mortality and morbidity risk.