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The determinants of lapse rates in the Italian life insurance market

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Abstract

We investigate the drivers of lapses in life insurance contracts of a large Italian insurance company. We consider both traditional (with profit or participating) and unit-linked policies. We develop two different types of analyses. First of all, we investigate the determinants of lapse decisions by policyholders looking at microdata on each contract and some macroeconomic variables. Then, through a panel study, we investigate the role of macroeconomic variables on lapses at the regional level. We observe that policy features affecting lapses of the two types of contracts are quite different. Only for the contracts stipulated few years before, we find weak evidence supporting the Interest Rate Hypothesis, i.e. a positive correlation between interest and lapse rates. Instead, there is some positive evidence that lapse rates are positively related to personal financial/economic difficulties (emergency fund hypothesis).

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Notes

  1. We tested for cointegration in the time series of the lapse rates of traditional contracts as there is evidence of a stochastic trend. Both the Engle–Granger and the Johansen cointegration tests reject the cointegration hypothesis. Similar results hold if we consider the (deseasonalized) monthly lapse rate, obtained by dividing the number of lapses in month t by the number of outstanding contracts in month \(t-1\).

  2. As a robustness test, we substituted the consumption rate, the unemployment rate and the growth rate of gross domestic product at market prices to the growth rate of disposable income. The main results are confirmed. We can not include the Treasury bond yield rate as it correlates with the national growth rate of disposable income. A larger set of regressors will be considered in Sect. 6, where regional indicators will be considered.

  3. Results do not change if we replace the log-linear trend with the lagged number of active contracts. However, we prefer to use a deterministic trend to avoid reverse causality issues in the regression models.

  4. In this paper we do not investigate the effect of lapse/surrender rates in the premium computation as it is done for example in [2].

  5. The inclusion of Antiduration in the GLM settings mimics a piecewise constant hazard rate.

  6. The fraction of traditional policies with periodic premium is higher than the fraction of traditional policies with unique premium (31% and 27%, respectively). In case of unit-linked contracts, the fraction of policies with unique premium is 27%, the fraction with periodic premium is 14%.

  7. We tested the robustness of the results of this model specification in several directions. We substituted the growth rate of the regional GDP to the growth rate of the disposable income. As an alternative metric of social conditions, we also considered the average educational level and the average life expectancy of the population. The main results are confirmed. Furthermore, we tested the significance of the first variation of the policy yield in explaining the decision to lapse the contract. The variable was never significant, while the other regression results remained unchanged.

  8. We tested for the presence of unit root for both endogenous and exogenous variables by using a Fisher-type unit root test for panel data based on Phillip-Perron univariate tests. None of the variables in the panel displays unit root with confidence level smaller than 1%. We addressed multicollinearity issues using the Variance Inflation Factor criterion (VIF); results show an average VIF between 2 and 3, which is below the threshold of 10 that would roughly indicate possible multicollinearity issues. The estimates are conducted with the Stata13 routine xtabond2: for a detailed explanation on the use of the two step GMM estimator see [33].

  9. We do not include the trend variable as we have only 3 years of observations.

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Authors and Affiliations

  1. Universita degli Studi di Milano-Bicocca, Milan, Italy

    Emilio Barucci, Tommaso Colozza, Daniele Marazzina & Edit Rroji

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  1. Emilio Barucci
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  2. Tommaso Colozza
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  3. Daniele Marazzina
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  4. Edit Rroji
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Barucci, E., Colozza, T., Marazzina, D. et al. The determinants of lapse rates in the Italian life insurance market. Eur. Actuar. J. 10, 149–178 (2020). https://doi.org/10.1007/s13385-020-00227-0

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