COVID-19 has caused significant economic and financial hardship around the world, and policyholders seeking to shore up finances may consider letting insurance coverage lapse.
Fortunately, insurers may be able to mitigate the impact of the novel coronavirus on lapse rates – both now and into the future – through five practical strategies described below. Note: These are not one-size-fits-all solutions. All five should be evaluated in the context of each insurer’s business model and with proper cost-benefit analysis, weighing the expected lapse reduction benefits against the costs of implementing each strategy.
1. Consumer Relief
Insurers have already introduced various customer relief measures, either proactively or in response to regulatory guidance. Some of the most common relief measures include premium holidays or extended grace periods. In Canada, as a result of COVID-19, several life insurers temporarily offered flexible premium payment options, including the possibility to defer premiums by 60-90 days under certain conditions, such as illness, quarantine, job loss, or absence from work to care for sick children or family members.
Customers may also be offered the option to temporarily suspend a policy or reduce the amount of coverage provided, with a corresponding decrease in premiums. Similarly, policyholders may be allowed to selectively suspend specific benefits, while maintaining a certain level of coverage and the benefits that are most important to them.
2. Incentives to Maintain Policy
A different strategy to control lapse rates is to offer additional incentives for clients to maintain their policies, such as new value-added services, rewards, or discounts that are unlocked at predefined milestones, for example, every three or six months.
Health and wellness benefits, such as free telemedicine services, are becoming popular in some markets. In Asia, for example, a global insurer partnered with various digital health providers to roll out free telehealth consultations to millions of customers, including all life insurance customers in one of its South East Asian markets via a telemedicine mobile app.
Insurers can also consider other perks that would be valuable to customers in the current environment, such as discounts on everyday purchases, groceries, drugs, or home improvement products. These benefits can be offered through partnerships with retailers or consumer brands, or self-funded by the insurer, provided that the expected lapse reduction benefits outweigh the cost of the rewards. In order to maximize the effectiveness of this strategy, the incentives offered need to be tailored to the market.
3. Disincentives against Policy Lapse
Various protective clauses can be introduced in new policy contracts to disincentivize customers against policy lapsing, for example, clauses triggering penalties or claw-back charges in the event of a lapse within a predefined time period. The introduction of such disincentive mechanisms would likely only apply to new policies issued, rather than existing contracts, and would need to be considered carefully in the current environment to make sure that the approach taken is reasonable and does not result in consumer backlash. The ability to enforce this strategy may also vary, depending on whether it is possible to apply penalty charges on the customer’s credit card or bank account on file. Insurers may also offer customers the option to waive or refund penalties if they revive their lapsed policies.
4. Front-loading Premiums
Another strategy consists in front-loading premiums, for example, by encouraging savvy customers looking for a bargain to pay their policy premium annually, instead of monthly, in exchange for a discount on total premiums paid and the option of converting to a monthly plan later on. By extension, front-loaded premium payment structures covering longer horizons may be considered, in addition to single-premium options.
5. Minimizing Process Friction
Optimizing and streamlining processes can also help mitigate lapse risk. Insurers may implement simple process improvements that aim to minimize the amount of friction involved in the policy renewal process, such as eliminating wet signature requirements for renewals or encouraging customers to opt for automatic renewals. Similar process improvements can be extended to other customer interaction points, including claim submissions, in order to improve overall customer satisfaction and retention. For example, a life insurer in India has introduced a service allowing customers to receive insurance contracts, renew policies, and initiate claims through a popular mobile messaging app.
Ongoing Persistency Improvement and Customer Value Management
In addition to the above strategies, insurers can use a variety of persistency improvement tools and approaches to support ongoing customer value management, satisfaction, and retention:
“Propensity to Lapse” Forecasting
“Propensity to lapse” forecasting models are important tools in the arsenal used by insurers to assess and manage the lapse risk of an insured life, in combination with other approaches such as early warning systems and retention teams. The predictive power of these models can benefit from new modeling techniques as well as alternative datasets, such as credit or transaction data through bancassurance relationships. For example, an RGA study found that the TransUnion TrueRisk® Life credit-based insurance score can be a useful predictor of lapses for both fully underwritten business and within a simplified-issue environment. The ability to leverage alternative sources of insight for lapse modeling may vary based on data availability, relevance, and applicable regulations.
Post-Level Term Strategies
“Premium jump” at the end of a life product term is a significant factor affecting mortality and lapse experience. Modeling post-level term book performance is useful to inform the design of creative retention approaches and for pricing optimization, including identifying the optimal post-level “premium jump,” taking into account lapse rate and mortality impacts as well as customer characteristics.
Early Warning System
Early warning systems have proven effective at reducing lapse rates. These systems are used to alert advisers when premiums have not been paid or when the customer’s propensity to lapse is predicted to have increased, prompting a follow-up to incentivize retention. In particular, the focus should be on identifying profitable, high-value customers with a high propensity to lapse and proactively initiating retention efforts, including targeted outreach to offer discounts or other incentives. Furthermore, implementing robust complaint management processes and analytics with real-time monitoring capabilities can help identify lapse risks and allow for proper preventive or corrective actions.
Retention teams reach out to customers who are at risk of lapsing their policies, and their advisors, offering various options to incentivize retention, such as premium holidays or alternative products and renewal terms.
Distribution Channel Management
Several insurers are actively managing their agent network to foster good behavior, best practices, integrity, and customer persistency, and actively cutting ties with agents that do not drive favorable outcomes.
Competitive Value Benchmarking
Up-to-date and accurate value benchmarking, including analysis of competitor premiums and product features, should inform regular product and value proposition refreshes to reduce the risk of losing customers to superior competitor offerings.
At RGA, we are eager to engage with clients to better understand and tackle the industry’s most pressing challenges together. Contact us to discuss and learn more about the RGA capabilities, resources, and solutions available to you.
The author wishes to thank Atreyee Bhattacharyya, Dan Lyons, Jesús Spinola, Richard Xu, and Tim Rozar for their contributions to this article.