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📉 '''Lapse ratio''' measures the proportion of [[Definition:Insurance policy | insurance policies]] that terminate because the [[Definition:Policyholder | policyholder]] stops paying [[Definition:Premium | premiums]] before the policy's maturity or renewal date, expressed as a percentage of policies in force at the start of a given period. It is one of the most closely watched [[Definition:Persistency | persistency]] metrics in the [[Definition:Life insurance | life insurance]] and [[Definition:Health insurance | health insurance]] industries, though it also appears in long-duration [[Definition:Property and casualty insurance | property and casualty]] lines. A high lapse ratio signals that customers are abandoning their coverage — which can erode an insurer's revenue base, distort its [[Definition:Actuarial assumption | actuarial assumptions]], and weaken the economic value of its [[Definition:Book of business | book of business]].

🔍 Actuaries and financial analysts calculate lapse ratios using policy count, face amount, or [[Definition:Annualized premium equivalent (APE) | annualized premium]], depending on the purpose. The resulting figure feeds directly into [[Definition:Reserving | reserve]] calculations, [[Definition:Embedded value | embedded value]] models, and [[Definition:Pricing | pricing]] frameworks. Under [[Definition:IFRS 17 | IFRS 17]], expected lapse rates form a key assumption in measuring the [[Definition:Contractual service margin (CSM) | contractual service margin]], while under [[Definition:US GAAP | US GAAP]] they influence [[Definition:Deferred acquisition cost (DAC) | deferred acquisition cost]] amortization. Regulators in markets like Japan, China, and across Southeast Asia scrutinize lapse experience closely, particularly in products with high early-year [[Definition:Commission | commissions]], because aggressive sales practices can inflate lapse rates and harm consumers. The [[Definition:Solvency II | Solvency II]] framework in Europe explicitly requires insurers to stress-test lapse risk as part of their [[Definition:Solvency capital requirement (SCR) | solvency capital requirement]] calculations.

📊 From a strategic standpoint, lapse ratio trends reveal a great deal about product design, distribution quality, and customer satisfaction. An insurer experiencing rising lapses may be facing competitive pressure on pricing, poor [[Definition:Claims experience | claims experience]] undermining trust, or simply a mismatch between the product sold and the customer's actual needs. [[Definition:Insurtech | Insurtech]] firms have begun deploying [[Definition:Predictive analytics | predictive analytics]] to identify policyholders at elevated lapse risk, enabling targeted retention interventions such as premium adjustments, coverage redesign, or proactive engagement. For [[Definition:Reinsurer | reinsurers]] providing [[Definition:Quota share | quota share]] or [[Definition:Coinsurance | coinsurance]] treaties on life portfolios, the ceding company's lapse experience is a critical underwriting variable — unexpected lapse spikes can shift profitability dramatically.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Persistency]]
* [[Definition:Surrender value]]
* [[Definition:Policyholder retention]]
* [[Definition:Embedded value]]
* [[Definition:Deferred acquisition cost (DAC)]]
* [[Definition:Actuarial assumption]]
{{Div col end}}

Definition:Lapse ratio - Revision history

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