OLDWICK, N.J.--(BUSINESS WIRE)--Lapse rates on ordinary life insurance products, which have been between 5.3% and 5.9% in 2012-2015, represent the lowest rates in nearly 20 years, according to a new A.M. Best special report.
The Best Special Report, titled, “Anemic Yields Put Spotlight on Retention,” also states that ordinary life persistency has been relatively steady, fluctuating between 81.1% and 86.5% in 1997-2015, a trend that appears to be somewhat correlated to the U.S. unemployment rate. In particular, the last two years have seen the highest persistency rates in nearly 20 years, around 86%.
Lapse and persistency rates remain important issues for U.S. life/annuity (L/A) insurers, as it can result in increased pressure on revenue and reduced profitability. While life insurance companies have taken various initiatives to reduce lapse rates, which refer to policies that are terminated by nonpayment of premium, insufficient cash values, or full surrenders, it is a complex issue dictated by a combination of enterprise-wide risk management (ERM) strategies and macroeconomic factors. The report also notes that new policy sales can be a relatively costly and time-consuming process, so as policies remain in force, measured by the persistency rate, many of these acquisition costs decline, leading to an increase in profitability.
Total ordinary life direct premiums written (DPW) has been on a generally increasing trend since 2009, with a slight decline in 2013. DPW reached $140.0 billion in 2015, the highest level since 2008. However, a variety of factors has shifted the composition of total life premiums written. Renewal premiums, for example, which accounted for 65.3% of ordinary life DPW in 2005, now account for 72.6% in 2015. During this shift, single premium DPW declined to $18.0 billion in 2009 from $40.3 billion in 2007. Allocations of single premium ordinary life policies as a percentage of total life premiums have declined as well, to 14.0% of overall DPW in 2015 compared with a high of 27.7% in 2007.
Generally, A.M. Best views more favorably those companies that have an increased percentage of higher creditworthy and less risky products, which can positively impact business profile. Unless it is a lapse-supported product, persistency generally benefits a company’s profitability; however, it is noted that even lapse-supported products need to persist for a good number of years to become profitable. Higher profit margins can be attained on renewal business, since acquisition expenses are recorded at the time of sale. Nevertheless, operating performance is also impacted by low interest rates, which may cause spread compression on interest-sensitive life products, such as universal life. Balance sheet strength is also impacted by strong persistency, as profitability from renewal business contributes to capital and surplus.
To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=251134.
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