Lapse

  • John Bragg: I can tell you how we handled the lapse numbers that came from the data in the paper. We used our own lapse rates for study purposes. We only used the Best lapses to corroborate that we were putting the companies in the right groups. To get our lapse rates, we compared the business in force from one year to the next.
    • `This meant that for UL it would stay in force as long as there was any funding to keep it in force.
    • It has nothing to do with anybody paying premiums; it has to do with business going off the books as UL would do when it runs out of funding.
  • Mr. Rhodes: An alternate definition of lapse for UL would be failure to pay the target premium or failure of the sum of premium payments to exceed the sum of target premiums. That's the definition I would use in a pricing setting. If you had more and more content of UL, where the lapse was only counted if the cash value was insufficient to cover the cost of the monthly deductions, that would tend to lower the lapse index.

1998 - SOA - Mortality and Lapse Rates, Society of Actuaries - 22p

  • Life insurance is a large yet poorly understood industry.
    • Most policies lapse before they expire.

2012 - NBER - Narrow Framing and Life Insurance, Working Paper 18601 - by Daniel Gottlieb & Kent Smetters - 38p 

  • (p4-5) - 2.1 Substantial Lapsing
    • LIMRA, a large life insurer trade association, and the Society of Actuaries define an insurance policy lapse as “termination for nonpayment of premium, insufficient cash value or full surrender of a policy, transfer to reduced paid-up or extended term status, and in most cases, terminations for unknown reason” (LIMRA 2011A, P. 7).
    • As Figure 1(a) shows, 29% of permanent insurance policyholders lapse within just three years of first purchasing the policies; within 10 years, 57% have lapsed.
      • In particular, nearly 88% of universal  life policies, a popular type of permanent insurance, do not terminate with a death benefit claim.

⇒ 2021 (Update) - AP - Lapse-Based Insurance - American Economic Review, 111 (8): 2377-2416, by Daniel Gottlieb and Kent Smetters - 101p

  • Commissioner Huff was appointed as Chairman of a new task force on life insurance policy lapsation.
    • The task force was charged with the responsibility of identifying specific problems involved and seeking solutions to the problem of life insurance policy lapsation.

1976-4, NAIC Proceedings

⇒ [Bonk: Commissioner Huff = William H. Huff III, Iowa Insurance Commissioner, 1971-1976]

  • The policy does not lapse if a premium is not paid;...
    • ....rather, it lapses if the fund balance becomes too small to pay the next month's cost of  insurance.

--  Ben H. Mitchell, [Bonk: a consulting actuary with Tillinghast in Atlanta - Years-?]

1981 - SOA - Universal Life (RSA81V7N412), Moderator: Samuel H. Turner, Society of Actuaries - 16p 

  • (327-328) - Jay Shaffer, Subcommittee Counsel - My next question has to do with short-term lapse rates.
    • ...
    • The insurance commissioner for West Virginia told a NAIC convention that the enormous waste represented by lapse should be reduced and that the problem is "worthy of the best thought of those responsible for conditions in the field of life insurance. There is no more important question before them today." That was at a NAIC convention held in 1915.
    • The Massachusetts insurance commissioner told his fellow insurance commissioners at a national insurance convention in New York that lapse was a serious problem and that “the time has come when some measures should be adopted to prevent this wholesale slaughter of policies of life insurance.' 
    • Mr. Anderson, that convention was held in 1872. Could you explain how the NAIC has acted to protect consumers from this loss that the FTC says runs to $200 million a year?
  • NAIC, Herbert W. Anderson, commissioner of insurance, State of Iowa - I am not aware of any specific model law or model regulation adopted by the NAIC which is designed to remedy the problem, the acknowledged problem, of early lapse of whole life insurance policies. We continue to recognize that it is a problem. I can only say that my expectation is that in 2078 you or your successor won't be quoting similar kinds of statements from the present. I believe that we recognize that it is a problem and is one that we have to get a handle on, and that now with this project which had priority behind us, that that is one of the most important priorities of the NAIC Life Insurance Subcommittee.

1978 0807, 0814 and 0815 - GOV (House) - Life Insurance Marketing and Cost Disclosure, John Moss (D-CA)  ---  [BonkNote]

  • 4. Another recent marketplace phenomenon has been a sharp increase in replacement activity, with indications that perhaps half of all lapses involve replacement situations.
    • The revised NAIC Life Insurance Replacement Model Regulation adopted in 1978 is based on a recognition that a replacement is not necessarily disadvantageous to a policyholder, i.e., some replacements are well-justified and definitely in the consumer's interest.

--  Statement On Behalf Of The American Council Of Life Insurance (ACLI) To The NAIC (A) Committee's Manipulation, Lapsation, Dividend Practices And Annuity Disclosure Task Force - June 8, 1982

1982-2,  NAIC Proceedings

  • Policy lapses and surrenders are an interesting behavior as it can either be a conscious decision to surrender a policy, a forced decision driven by cash needs, or a failure (conscious or not) to pay the required premiums to keep a policy inforce.  (p48)

2014 - SOA - Modeling of Policyholder Behavior for Life Insurance and Annuity Products, Society of Actuaries - 92p

  • 1951 - SOA - Lapse Rates, by Charles F.B. Richardson and John M. Hartwell, Society of Actuaries - 59p
  • 1960 - SOA - First Year Lapse Rate, by Norman F. Buck, Society of Actuaries - 57p
  • 1979-1, NAIC Proceedings - Report to the NAIC by the Industry Advisory Committee on Policy Lapsation - December 1978
  • 1979 0710 and 1017 - GOV (Senate) - FTC Study of Life Insurance Cost Disclosure, Howard Cannon (D-NV)   ---  [BonkNote] 
  • 1981-2, NAIC Proceedings - AAA to NAIC Task Force on Manipulation, Lapsation, Dividend Practices and Annuity Disclosure - re: Report of the Committee on Dividend Principles and Practices - ATTACHMENT ONE-B, American Academy of Actuaries - (p732-734) - 3p
  • 1981-2, NAIC Proceedings - Attachment ONE-A1 Advisory Committee on Policy Lapsation June, 1981 Proposed Lapse Disclosure System - Feasibility Test and Procedures - (p649-731)
  • 1984 - SOA / LIMRA - 1985-86 Long-Term Ordinary Lapse Survey in the United States, Society of Actuaries - 14p
  • 1991-1992 - SOA - Report Of The Life Insurance Marketing And Research Association, Inc. I. 1988-89 Long-Term Ordinary Lapse Survey In The United States, Society of Actuaries - 38p
  • 1995 - SOA - 1993-94 United States Lapses by Duration and Product Line: Long-Term Ordinary Lapse Survey*, Society of Actuaries - 26p
  • 2013 - SOA - Life Insurance Regulatory Structures and Strategy: EU Compared with US - 92p

  • 2013 - AP - Life Insurance Lapse Behavior, Stephen Fier and Andre Liebenberg, North American Actuarial Journal, 2013, vol. 17, issue 2, 153-167

    • Life insurance policy lapses are detrimental to issuing insurers when lapses substantially deviate from insurer expectations.
  • 2014 - AP - On Lapse Risk Factors in Solvency II - 79p
  • 2020 - AP - Estimating Extreme Cancellation Rates in Life insurance - 31p
  • 2022 - NBER - Aggregate Lapsation risk, by Ralph S. J. Koijen, Hae Kang Lee, Stijn Van Nieuwerburgh, Working Paper 30187 - 57p
  • 2022 - MDPI - What We Know about Research on Life Insurance Lapse: A Bibliometric Analysis - [link-Download]
  • Mr. Mead: We feel that if periodically attention is called to the agents, whether their business has been satisfactory as regards persistency, or unsatisfactory, we shall do much to encourage the good man, and also the poor man, that he may put his business on a higher plane.
    • It will also be of advantage to us in studying the pitfalls of many of our producers.  (p254)

1919 - The Record, American Institute of Actuaries - Estimating the Rate of Persistency - [PDF-GooglePlay-451p]

  • SOA - 
  • Legal Cases - 
    -Johnston v Conseco
    -Smith v 
    -Maloof v
  • LIMRA Quiz 
  • (a) Mr. Bruce E. Shepherd, Executive Vice President, Life
    Insurance Association of America, presented a resolution
    to the committee recommending that policyholders should not surrender or lapse an existing policy of permanent life insurance and replace it with new life insurance.
  • A copy of the resolution is attached.

1961-2, NAIC Proceedings

  • Definition of "Lapse"
    • There is a wide variety of definitions of lapsation in existence in the insurance industry today.
      • This variation is bound to increase over the next few years as traditional products become superseded by new flexible products with indexed protec­tion, stop and go features, and other flexible options, and as companies define lapse on these products without respect company industry standards.
    • For traditional life insurance products, the interest in lapsation is usually in premium-paying policies.
      •  In this case, lapsation is often considered to be the cessation of premium payments for any reason other than death, maturity, expiry, transfer to an automatic premium loan status, or reaching the end of the stipulated premium-paying period.

1981-2, NAIC Proceedings

  • Universal life insurance is more flexible than whole life.
    • You can change the amount of your premiums and death benefit.
      • But any changes you make could affect how long your coverage lasts.
      • If your premiums are lower than the cost of insurance, the difference is taken from the cash value. If the cash value reaches zero, your policy could lapse.
    • The company will send you a report each year showing your cash value and how long the policy might last.
    • The estimate is based on the cash value amount, the cost of insurance, and other factors. Review it carefully.
    • You might need to pay more in premiums to keep the policy in effect until the maturity date.

tdi.texas.gov/pubs/consumer/cb018.html

  • 1979 0525 - Letter - ACLI to NAIC Life Insurance (C3) Cost Disclosure Task Force - Re: The Report of the Industry Advisory Committee on Policy Lapsation
    • --  1979-2, NAIC Proceedings
  • (Senator Cannon) The CHAIRMAN:  So that the first 13 months is the highest?
  • (FTC)  Mr. LYNCH: The 13-months-lapse rate is typically the highest, and it's about 20 percent or so.

1979 0710 and 1017 - GOV (Senate) - FTC Study of Life Insurance Cost Disclosure, Senator Cannon - [PDF-592p]

  • It is important to understand the various ways in which life-insurance policies are terminated. (p4287)
  • From the policyholder's point of view, terminations by death, by disability, by maturity, represent satisfactory completions of the insurance contract…. (p4287)
  • It is a generally recognized fact that the great bulk of life insurance terminates in a manner that cannot be regarded either by the companies or by the policyholders as entirely satisfactory. (p4287)
  • A great deal of insurance terminates within a short time after it is sold, by reason of the failure of the insured to keep up the payments of his premiums. (p4287) 
  • Let me repeat that because it is very important:   When such failure to maintain premium payments occurs before the policyholder is entitled to a refund of any portion of the reserve against his policy, the insurance is said to have terminated by lapse. (p4287) 

-- Dr. Davenport - (SEC) Securities and Exchange Commission, special economic consultant - insurance section

1940 - GOV (Senate) – TNEC – Temporary National Economic Committee, Joseph C. O’Mahoney (D-WY) - PART 10-10 A: Life Insurance -  [842p-archive.org]

⇒  1938-1941 – GOV (Senate) – TNEC – Temporary National Economic Committee, Joseph C. O’Mahoney (D-WY)  ---  [BonkNote]

  • I think, overall the data reflect that too many consumers are making a hasty purchase and then just dropping their policies—up to 20 percent in 1976, and double the rate of 1951.
    • Considering the fact that Consumer do not get good cost information, we could hardly say that it was due to the fact that they are discovering lower cost policies.
    • I have seen no one claim that that is the reason for the increase in the termination rate.

--  Lee Richardson, Acting Director, U.S. Office of Consumer Affairs, Department of Health, Education, and Welfare

1979 0710 and 1017 - GOV (Senate) - FTC Study of Life Insurance Cost Disclosure, Howard Cannon (D-NV)   ---  [BonkNote] 

  • NAIC Working Groups
    •  ACLI Letter
    • -LIBG - Current, versions 198x v 199x, -LIMRA
  • Julius L. Clarke, Insurance Commissioner, of Massachusetts - In regard to this matter of dividends, every member of this convention is aware of the immense profits made by companies from lapses; and from that source many of the companies have been able to make dividends. There is no doubt of that at all.
    • After eliminating from the amount of ceased insurance in these sixty-five companies in 1870, there remains $254,000,000, mostly of lapsed insurance; an immense increase over the previous year.
    • And so the amount of lapses is growing year by year to on enormous aggregate; and I think with Mr. Paine, of Maine, that the time has come, when some measures should be adopted to prevent this wholesale slaughter of policies of life insurance.
  • George W. Miller, Superintendent of the New York Insurance Department - I would ask Mr. Clarke, if he does not consider that the companies would have been able to pay much larger dividends, if there had never been a single lapse?
  • Julius L. Clarke, Insurance Commissioner, of Massachusetts -: I don't know as to that. I know that the managers of four or five New York companies, have stated that their hope of success and profit, rested in the number of lapses which would accrue in a given year.
  • George W. Miller, Superintendent of the New York Insurance Department - Then there must be something vicious behind the lapses.

1871-2, NAIC Proceedings (fka National Insurance Convention)  ---  [BonkNote]  ---  657p

  • Touching the vexed question of "lapses," much comment has been made, and no doubt some abuse of the business is indicated by the immense volume of policies returned as lapsed; but it is a difficult point to deal with.
  • There is a large percentage of waste in all human effort, and even in oil natural movement Lapses unhappily prevail even in religious affairs, and some of the seed grain is wasted by the most careful sower.
  • You must be careful how you pull up the tares in the life insurance field, lest you destroy the whole crop. - [Bonk: Change Without Damage]

--  J. B. Ecclesine, editor of The New York Underwriter

1871-2, NAIC Proceedings (fka National Insurance Convention)  ---  [BonkNote]  ---  657p