Lapse Ratio

What is 'Lapse Ratio'

Lapse ratio is the number of policies that are that are not renewed compared to the number of policies that were active at the beginning of that same period. The lapse ratio represents the percentage of policies that were not renewed, and thus have lapsed in coverage. Lapsed policies are not the same as canceled policies.

BREAKING DOWN 'Lapse Ratio'

Insurance companies strive to keep loss ratio low by having their policyholders consistently renew their policies since policy renewals mean continued earnings. If an insurer sent renewal notices to 1000 current automobile insurance policy holders and 700 of those policies are renewed, the lapse ratio is (1000-700)/(1000), or 30 percent. The lapse ratio considered acceptable to an insurance company can vary by type of policy, geography and other factors.

The importance of lapse ratio

There are several reasons why an insurance company looks at its lapse ratio. One of the primary pieces of information that the lapse ratio can convey is how competitive the policy rates are relative to other insurance companies. If a new insurance company offers better rates this could lead to more policyholders switching to the less expensive option. Consumer-centric insurance policies, such as those covering automobiles or homes, may have higher lapse ratios because policyholders are more willing to shop around for better rates; businesses with commercial insurance may be less likely to frequently change their policies.

A number of factors can affect lapse ratio, although it is somewhat out of the control of the Insurer if they cannot offer improved premium terms. Uncompetitive premiums are the most likely reason for an increase in lapse ratio. This may be because they are seeking higher premiums, or a competitor may have entered the market with cheaper rates. When an insurer considers a policy lapsed can also have an effect. Normally, if the insurer doesn't receive renewal instructions by the expiration date, policies are automatically lapsed. An insurer can delay this process to send out chasers or make contact with the policyholders to try to retain the business, for example.

Strategies for Reducing Lapse Ratio

Companies can also choose to reduce their lapse ratio by offering more competitive rates, by ensuring that policyholders are aware of their lapse date by sending frequent reminders and by appealing to personal sentiment. For example, an insurance company whose rates are higher than those of its competitors may appeal to the number of years the individual has held the policy in order to appeal to feelings of loyalty. Larger insurance companies are more likely to have substantial marketing budgets that they can dip into in order make their offerings and benefits known.