Life insurance lapse behaviour: evidence from China

Abstract

We investigate determinants of lapse rates in the Chinese life insurance industry using firm-province level data from 2005 to 2013. We conduct a panel study, exploring significant regional differences and dramatic changes in demographic conditions during the urbanisation process in China. First, we find that the unemployment rate is positively related to lapse rates, and the driving force is migrant population rather than local urban residents. This provides evidence for the emergency fund hypothesis from a new perspective. Second, we find that an insurer’s reputation is negatively linked to lapse rates. We define this as the ‘reputation hypothesis’. Third, our findings are also consistent with the interest rate hypothesis. We extend the literature by decomposing life insurance products into three types and find that interest rates are positively (negatively) associated with lapse rates of investment-type (protection-type) products. Lapse rates of health products are not related to interest rates. Fourth, our empirical result suggests that high lapse rates can potentially weaken the insurers’ financial soundness and harm new business.