Estimating and reducing lapse risk
The financial crisis highlighted the perils of lapse risk, as the strained economic conditions caused some usually docile life policyholders to surrender more easily than expected, while others remained passive. The academic literature isn’t short of ways to tackle the problem – but insurers are finding implementing them difficult. Laurie Carver reports
Insurers love to trumpet their persistency - how their loyal customers stick with them through thick and thin. The flip-side of this is lapse risk, when customers close their policies early. In the case of variable annuities (VAs), this can involve a guaranteed return the fund itself has not achieved - and therefore a loss.
During the financial crisis, with interest rates dropping and fund values taking large hits, the incentive to lapse was strong and some insurers experienced large outflows
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