Estimating and reducing lapse risk

The persistency problem


Insurers love to trumpet their persistency - how their loyal customers stick with them through thick and thin. The flip-side of this is lapse risk, when customers close their policies early. In the case of variable annuities (VAs), this can involve a guaranteed return the fund itself has not achieved - and therefore a loss.
During the financial crisis, with interest rates dropping and fund values taking large hits, the incentive to lapse was strong and some insurers experienced large outflows, du