On the Drivers of Lapse Rates in Life Insurance

Abstract

Lapse risk is the largest non-financial risk which life insurance companies are faced with. Lapse refers to the contractual disruption of an insurance policy before its maturity. The intention of this paper is to gain an insight into the behavior of lapse rates by identifying the most significant variables which drive lapse rates. The study consists of two approaches: a theoretical approach where current literature on lapses is reviewed and an empirical approach where real lapse data is modelled with generalized linear models. Findings include inflation, external rates of return, internal rates of return, and lagged lapse rates as the main drivers of lapse rates.