Tag: lapse rate

Aggregate Lapsation Risk

Mary Pat Campbell

Link: https://www.nber.org/papers/w30187

Graphic:

Abstract:

We study aggregate lapsation risk in the life insurance sector. We construct two lapsation risk factors that explain a large fraction of the common variation in lapse rates of the 30 largest life insurance companies. The first is a cyclical factor that is positively correlated with credit spreads and unemployment, while the second factor is a trend factor that correlates with the level of interest rates. Using a novel policy-level database from a large life insurer, we examine the heterogeneity in risk factor exposures based on policy and policyholder characteristics. Young policyholders with higher health risk in low-income areas are more likely to lapse their policies during economic downturns. We explore the implications for hedging and valuation of life insurance contracts. Ignoring aggregate lapsation risk results in mispricing of life insurance policies. The calibrated model points to overpricing on average. In the cross-section, young, low-income, and high-health risk households face higher effective mark-ups than the old, high-income, and healthy.

Author(s): Ralph S. J. Koijen, Hae Kang Lee & Stijn Van Nieuwerburgh

WORKING PAPER 30187
DOI 10.3386/w30187

Publication Date: July 2022

Publication Site: NBER

USAA Customers Have a Strong Grip on Their Life Policies: Researchers

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/07/13/usaa-customers-have-a-strong-grip-on-their-life-policies-researchers/

Excerpt:

USAA — a policyholder-owned insurer that has historically focused on serving military veterans and their relatives — may be the big U.S. life insurer with the lowest policy lapse rate.

A team of researchers led by Ralph S.J. Koijen has presented data supporting that conclusion in a new analysis of how economic slumps affect which insureds drop their life insurance.

To conduct that analysis, the Koijen team crunched data from the public financial reports of the 30 biggest U.S. life insurer groups, for a period from 1996 through 2020.

….

Overall, a severe crisis, such as the 2007-2009 Great Recession, might increase a company’s life policy lapse rate by about 1 percentage point or more, after holding other factors considered equal, the researchers concluded.

The researchers found that, after holding factors such as risk class, smoking use and type of coverage equal, being under age 35 increased the risk of letting a life policy lapse by 46%, and being ages 25 through 34 during an economic slump increase lapse risk by an additional 15%.

Author(s): Allison Bell

Publication Date: 13 July 2022

Publication Site: Think Advisor