Lapse Risk

  • The third is the lapse risk, which is defined as the risk that the policy will lapse before the acquisition costs are recovered.

--  William M. Frasier

1996 - SOA - Accounting for Reinsurance Agreements, Society of Actuaries - 22p

  • In terms of some additional risks that you assume, you have the regular lapse risk, but you also have what I call an equity-induced lapse risk.
    • If the market tanks, people are going to be unhappy, and they're liable to leave.
    • With so little experience and no experience in a down market, we have no experience to predict what sort of an impact that will have on lapse rates.

1997 - SOA - Equity-Indexed Products Overview, Society of Actuaries - 40p

  • IAIS Question 83:
    • NAIC Response: Lapse risk is an example of an overall important category of policyholder behavior, which is an important risk in a number of products such as universal life and variable annuities.  (p11)

2015 0213 - IAIS - IAIS Insurance Capital Standard Public Consultation Document - Final NAIC comments – February 13, 2015 - 18p

  • The pre-paid funding model (with the possibility of continued collection of premiums even in a recovery or resolution phase), the longer duration of the claims process, and penalties for early surrenders of (life) insurance policies (“lapse risk”) make insurers less susceptible to liquidity runs.
  • However, excessive lapse risk can arise from adverse economic conditions.
    • For instance, higher interest rates may trigger higher lapse rates as more policyholders switch to other products for higher return, which may result in potential loss caused by selling investment assets for cash (or other assets) needed to cover surrender payments. (p14)

2014 07- IMF - Macroprudential Solvency Stress Testing of the
Insurance Sector - Working Paper (WP14133)