What Policy Features Determine Life Insurance Lapse? An Analysis of the German Market

Abstract

With the largest data set ever used for this purpose (covering more than 1 million contracts), we analyze the impact of product and policyholder characteristics on lapse in the life insurance market. The data are provided by a German life insurer and cover two periods of market turmoil that we incorporate into our proportional hazards and generalized linear models. The results show that product characteristics such as product type or contract age and policyholder characteristics such as age or gender are important drivers for lapse rates. Our findings improve the understanding of lapse drivers and might be used by insurance managers and regulators for value‐ and risk‐based management.

Policyholder and Insurance Policy Features as Determinants of Life Insurance Lapse - Evidence from Croatia

“…An empirical significance of 0.025 indicates that there is a correlation between age and life insurance options. The result is in the accordance with the result of the empirical study of life insurance options in Italy done by Cerchiara, Edwards, and Gambini [2009] as well as the study of Eling and Kiesenbauer [2013] based on the German insurance market. The nexus between gender and life insurance lapse is presented in Table 3.…”

“…In cases of unfavourable market conditions the assets can be liquidated at low value, which could produce loss for the insurers. An additional effect on the profitability of life insurers results from a more conservative investment strategy that might be used in order to ensure an adequate level of liquidity, which will reduce the return [Elling and Kiesenbauer 2013]. The insurers will not receive the cash flow from lapsed life insurance policies and that additionally affects their liquidity and profitability.…”

“…The main sources of data on life insurance lapse are life insurance associations and their surveys, national supervisory authorities and insurance companies [Elling and Kohanski 2013]. The current empirical research on life insurance lapse is focused on developed countries [Renshaw and Haberman 1986;Kagraoka 2005;Milhaud, Loisel, and Maume-Deschamps 2010;Eling and Kiesenbauer 2013; Canadian Institute of Actuaries 2014]. Although the literature on factors influencing life insurance demand in emerging countries has been increasing [most recently studies are: Elango and Jones 2011;Śliwiński, Michalski, and Roszkiewicz 2013;Dragos 2014], according to our best knowledge, besides two papers on the general characteristics on life insurance lapse in India [Kumar 2009;Surana and Gaur 2013], there is no study of policyholder and insurance contract factors influencing the exercise of life insurance options in emerging life insurance markets.…”

Reserve-dependent surrender rates

“…The dependence on the interest rate appears obvious and is thoroughly examined by De Giovanni [5], who calculate reserves by solving partial differential equations numerically. There exists a large amount of literature examining relevant explanatory variables but since these studies appear somewhat marginal to our approach we refer to Eling and Kiesenbauer [6] and references therein for a comprehensive literature overview. See also Gatzert [9] and references therein for an overview on approaches to policyholder options.…”

Life Insurance Cash Flows with Policyholder Behavior

“…An empirical analysis of policyholder behavior in the German market and further references on policyholder modeling can be found in [4]. In contrast, one can consider surrender and free policy exercises as rational, where they purely occur if it is beneficial for the policyholder with some objective measure, see, e.g., [5].…”