As part of our ongoing insurance how-to series we continue to explore the terminology and practices used in the Insurance world.
Today we’ll be explaining Lapse Ratio, how it is used and the effects is has, giving examples and calculations. (If you haven’t already, you may also like to see our articles on Claims Loss Ratio and Combined Ratio.)
We will explore the following topics:
- What is a Lapse Ratio?
- What do Insurers use a Lapse Ratio for?
- What factors can effect a Lapse Ratio?
What is a Lapse Ratio?
This is the proportion of renewals that an Insurer secures in relation to the number that they invited expressed as a percentage.
So, if an Insurer invited 200 renewals and secured instructions to renew on 150 the Lapse Ratio would be 25% – in other words 25% of the cases did not renew and are therefore deemed to have been Lapsed.
The term Lapsed only applies to policies that have not renewed at expiry and would not include policies that been cancelled during the policy year.
What do Insurers use a Lapse Ratio for?
A Lapse Ratio is a key piece of information to an Insurer as it allows them to see if the renewal terms that they are offering are competitive within the market.
This Ratio will be continually monitored and an acceptable percentage will vary depending on the types of cover involved.
Traditionally Personal Lines type policies (Motor, Household etc) will have a higher Lapse Ratio as policyholders are far more likely to shop around for alternatives than they will on a large Commercial type policy.
What factors can effect a Lapse Ratio?
A Lapse Ratio can be effected by a number of things although it is to a certain extent beyond the control of the Insurer if they cannot offer improved premium terms.
Uncompetitive renewal premiums is the most likely reason for an increase in Lapse Ratio. This may be as the result of premium increases that the Insurer are seeking or if a competitor has entered the market with cheaper rates.
The stage at which an Insurer classes a policy as Lapsed can also have an effect. This would normally be if no instructions are received by expiry and policies are automatically Lapsed.
However, if the Insurer delays this process to send out chasers or makes contact with the policyholders it is possible that they will still be able to retain some of the business and hence the Lapse Ratio will decrease.
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I M AN MBA STUDENT
NOW I UNDERSTOOD WHAT IS LAPSE RATIO