Lapse Risk

  • The pre-paid funding model (with the possibility of continued collection of premiums even in a recovery or resolution phase), the longer duration of the claims process, and penalties for early surrenders of (life) insurance policies (“lapse risk”) make insurers less susceptible to liquidity runs.
  • However, excessive lapse risk can arise from adverse economic conditions.
    • For instance, higher interest rates may trigger higher lapse rates as more policyholders switch to other products for higher return, which may result in potential loss caused by selling investment assets for cash (or other assets) needed to cover surrender payments. (p14)

2014 07- IMF - Macroprudential Solvency Stress Testing of the
Insurance Sector - Working Paper (WP14133)