Evaluating the Cost of a Lapse in Life Insurance and its Implications on Developing a Policyholder Retention Strategy for a Company

In the insurance industry, many companies focus on policyholder retention as one of their key tools to retain premiums collected from customers. Customers may lapse after their purchases. Insurance companies will not receive premiums and have to pay out surrender benefits which makes it costly for an insurer. Indeed, understanding the cost of a lapse is important to retain policyholders. This paper focuses on the cost of a lapse in life insurance, and its implications on developing policyholder retention strategies. The first part of the paper summarizes the general background of life insurance, lapses, and conservation strategies. The second part introduces the modeling and simulations of three types of life insurance policies. The economic gain of a life insurance policy is defined as the accumulated value (AV) of past premiums plus the present value (PV) of future premiums until death/lapse less the PV of future benefits and less the AV of acquisition costs at issue. Next, the paper proceeds to analyze the cost of a lapse of a policy and quantify it as the difference between the economic gain of a policy at 0% lapse rate and that at 10% lapse rate. Based on the cost of a lapse, which is the same as the gain from conservation strategies, the insurance company will be able to rank its policies and prioritize which policies to focus on. Recommendations on developing conservation strategies to retain policyholders are discussed in the following section from both an actuarial perspective and a business perspective