Research on lapse in life insurance: what has been done and what needs to be done?

Abstract

Purpose

The purpose of this paper is to review research on lapse in life insurance and to outline potential new areas of research in this field.

Design/methodology/approach

The authors consider theoretical lapse rate models as well as empirical research on life insurance lapse and provide a classification of these two streams of research. More than 50 theoretical and empirical papers from this important field of research are reviewed. Challenges for lapse rate modeling, lapse risk mitigation techniques, and possible trends in future lapse behavior are discussed.

Findings

Lapse rate modeling has been a very active field of research in the last years, as evidenced by the 44 papers on lapse modeling considered in this review. Moreover, a fair amount of empirical work (another 12 papers) has been done, especially on the issue of how environmental variables affect lapse. Research on individual policyholder and contract information is more scarce, since such information is typically treated as confidential.

Practical implications

The risks arising from lapse are of high economic importance. Lapsation is thus of interest not only to academics, but is highly relevant for the industry, regulators, and policymakers, especially in regard to designing an appropriate regulatory environment. Lapsation also impacts many actuarial tasks, such as product design, pricing, hedging, and risk management. A review of the recent literature might be helpful for these tasks.

Originality/value

To the best of the authors' knowledge, this is the first structured review of the increasingly important literature on life insurance lapsation. Next to the structured review of the existing models and the empirical evidence, the paper also contributes to the literature by discussing challenges for lapse rate modeling and possible trends.

Citation

Eling, M. and Kochanski, M. (2013), "Research on lapse in life insurance: what has been done and what needs to be done?", Journal of Risk Finance, Vol. 14 No. 4, pp. 392-413. https://doi.org/10.1108/JRF-12-2012-0088