Lapse Rate Calculation Insurance

Insurance Lapse Rate Calculator

Calculation Results

Lapse Rate

0%

Retention Rate

0%

function calculateLapseRate() { var start = parseFloat(document.getElementById('policiesStart').value); var added = parseFloat(document.getElementById('newPolicies').value); var lapsed = parseFloat(document.getElementById('lapsedPolicies').value); if (isNaN(start) || isNaN(added) || isNaN(lapsed) || start < 0) { alert('Please enter valid positive numbers for all fields.'); return; } var totalExposure = start + added; if (totalExposure === 0) { alert('Total policies cannot be zero.'); return; } var lapseRate = (lapsed / totalExposure) * 100; var retentionRate = 100 – lapseRate; document.getElementById('lapsePercent').innerText = lapseRate.toFixed(2) + '%'; document.getElementById('retentionPercent').innerText = retentionRate.toFixed(2) + '%'; document.getElementById('lapseSummary').innerHTML = 'Out of a total pool of ' + totalExposure + ' policies (start + new), ' + lapsed + ' were discontinued. This results in a lapse rate of ' + lapseRate.toFixed(2) + '%. High lapse rates may indicate issues with pricing, customer service, or market competition.'; document.getElementById('lapseResultContainer').style.display = 'block'; }

Understanding Lapse Rate in the Insurance Industry

In insurance, the lapse rate is a critical metric used to measure the percentage of policies that are terminated by the policyholder or the insurer due to non-payment of premiums or active cancellation. It serves as a direct indicator of customer retention and the long-term health of an insurance portfolio.

The Importance of Monitoring Lapses

Insurance companies invest significant capital in "Acquisition Costs"—the expense of marketing to and onboarding a new client. If a policy lapses early, the insurer may not have collected enough premium to cover these initial costs, leading to a financial loss. A low lapse rate indicates high customer satisfaction and policy "stickiness."

How the Lapse Rate is Calculated

The standard formula used in this calculator is:

Lapse Rate = [Number of Lapses / (Policies at Start + New Policies Issued)] x 100

Realistic Example Calculation

Imagine a life insurance agency starts the quarter with 5,000 active policies. During the quarter, they write 500 new policies. By the end of the quarter, records show that 110 policies lapsed because the owners stopped paying or cancelled the coverage.

• Total Base: 5,000 + 500 = 5,500
• Lapses: 110
• Calculation: (110 / 5,500) = 0.02
• Lapse Rate: 2.00%

Common Factors Influencing Lapse Rates

1. Economic Conditions: During recessions, policyholders may prioritize immediate expenses over insurance premiums.
2. Product Pricing: If competitors offer significantly lower rates for similar coverage, savvy customers are more likely to switch (lapse).
3. Customer Service: Poor claims processing or lack of communication from agents often leads to higher turnover.
4. Policy Duration: Typically, lapse rates are highest in the first year of a policy and decrease as the policy ages and the customer builds a relationship with the brand.

Expert Tip for Actuaries

While the basic lapse rate is useful for broad management, deep-dive analysis should categorize lapses by "duration" (how long the policy was active) and "product type" to identify specific weaknesses in the product lineup or underwriting process.