What is a Lapse Rate and Why is It Important?
A lapse is the cancellation of coverage due to the non-payment of premiums. Lapse rates can be an important component of the pricing of long term care insurance plans.
Consumer advocates and regulators fear that some insurance companies will sell policies to people who are probably not good candidates for purchasing the insurance and thus count on them to lapse their coverage.
By doing so, an insurance company has received premiums for a period of time but no longer faces the risk of paying out benefits.
Use of a high lapse rate assumption in setting premiums can result in a lower-priced product and the use of a low lapse rate assumption in setting premiums can result in a higher-priced product.