Understand the problem of lapsing policies

A lapse occurs when a policy is not renewed or is cancelled because the client does not want to pay the premium.

Australian lapse rates are high. Lapse rates are low in year one but jump up significantly thereafter. Lapse rates for income protection policies can be as high as 16% a year and lapse rates for life insurance policies can be as high as 12% a year. This equates to an average term of between 7 and 8 years, which is remarkably short and means those high up-front costs have to be amortised over a very short period.

Insurers, and others tend to attribute the blame for lapses to advisers. Their analysis ignores rising premiums and changing client circumstances and priorities. It’s not surprising that a healthy 55 year old male, earning an average income of about $60,000 a year, confronted with an ever increasing income protection premium, but reduced cover (he is now closer to age 65), increased assets (his home and his super have jumped up over the last five years) and reduced obligations (the kids are nearly grown up and off his hands) and a wife back in full time work decides he does not need income protection any more, and cancels the policy rather than paying the $6,000 premium.

This is a rationale consumer decision, not a culpable act of corporate economic vandalism.

Newer and better products from insurers sees old policies lapse in favour of new, better, policies.

Despite the natural forces in favour of lapsing risk insurance policies as needs and circumstances change, research shows there is a positive correlation between high lapse rates and high up-front commissions and relatively low trailer commissions.

Lapses can never be eliminated but advisers should be vigilant and do their best to discourage inappropriate lapses.

The Dover Group