MAIN DETERMINANTS OF LAPSE IN THE GERMAN LIFE INSURANCE INDUSTRY

This paper studies the determinants of lapse in the German life insurance industry. Logistic regression models are employed using data on macroeconomic indicators and company characteristics of 133 German life insurers from 1997 to 2009. Five different product categories are considered (endowment, annuity, term life, group, and other). The findings indicate that the main lapse determinants are very similar across all product categories, except that the direction of impact is reversed for the product category "other,'' which consists almost exclusively of unitlinked business. In particular, the interest rate and emergency fund hypotheses are supported only for unit-linked business, while these hypotheses do not hold for the remaining product categories. Overall, the analysis provides an understanding of lapse dynamics related to economic indicators and company characteristics. The derived models can be used to predict lapse rates for the different product categories considered. The results are important for insurance company managers, regulators, and life insurance customers.