Lapse Rate Insurance Calculation

Insurance Lapse Rate Calculator

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Policy Lapse Rate:

0%

function calculateLapseRate() { var initial = parseFloat(document.getElementById('initialPolicies').value); var lapsed = parseFloat(document.getElementById('lapsedPolicies').value); var resultDiv = document.getElementById('lapseResult'); var percentageSpan = document.getElementById('lapsePercentage'); var analysisP = document.getElementById('lapseAnalysis'); if (isNaN(initial) || isNaN(lapsed) || initial initial) { alert('Lapsed policies cannot exceed the total number of policies at the start.'); return; } var lapseRate = (lapsed / initial) * 100; var retentionRate = 100 – lapseRate; percentageSpan.innerHTML = lapseRate.toFixed(2) + "%"; resultDiv.style.display = 'block'; var analysisText = "Your Policy Retention Rate is " + retentionRate.toFixed(2) + "%. "; if (lapseRate < 5) { analysisText += "This is considered an excellent retention level for most insurance lines."; } else if (lapseRate < 12) { analysisText += "This is within the standard industry range."; } else { analysisText += "This lapse rate is high. Consider reviewing customer satisfaction or pricing structures."; } analysisP.innerHTML = analysisText; }

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In the insurance sector, the lapse rate is one of the most critical Key Performance Indicators (KPIs). It measures the percentage of policies that are terminated by the policyholder or the insurer due to non-payment of premiums or active cancellation before the policy term expires or a claim occurs.

What is the Lapse Rate Formula?

The calculation is straightforward but provides deep insights into the health of an insurance portfolio. The mathematical formula used in our calculator is:

Lapse Rate = (Number of Lapsed Policies / Number of Policies at Start of Period) × 100

Why the Lapse Rate Matters

Insurance companies invest heavily in Customer Acquisition Costs (CAC). It often takes several years of premium payments before a policy becomes profitable for the carrier. When a policy "lapses" early:

• Sunk Costs: The marketing and underwriting costs are never recovered.
• Lower Valuation: High lapse rates reduce the "Embedded Value" of an insurance company.
• Adverse Selection: Sometimes, the healthiest policyholders lapse while those with higher risks maintain coverage, creating an imbalance.

Realistic Example Calculation

Imagine a life insurance provider, "SecureLife," starts the fiscal year with 50,000 active policies. Throughout the year, they notice that 3,500 policyholders stopped paying their premiums or requested a cancellation. Using the calculator:

1. Initial Policies: 50,000
2. Lapses: 3,500
3. Calculation: (3,500 / 50,000) = 0.07
4. Result: 7% Lapse Rate

This would indicate a 93% retention rate, which is generally considered healthy in the life insurance sector, though benchmarks vary by product type (e.g., Term Life vs. Auto Insurance).

Factors Influencing High Lapse Rates

Several variables can cause a spike in your lapse metrics:

Factor	Description
Economic Climate	During recessions, policyholders may cut "non-essential" expenses like optional insurance riders.
Rate Increases	Significant premium hikes often drive customers to shop around for cheaper competitors.
Product Fit	If a policy was sold that didn't meet the customer's long-term needs, they are more likely to cancel within 12-24 months.