By Martyn Gilling, Vice President, Business Development, RGA Canada1
Concerns about policy lapses and the associated anti-selective mortality experience are generating frequent conversations among actuaries in North America and Australia.
Australia’s advisor-driven term market consists almost entirely of yearly renewable term (YRT) policies, some of which are bundled with acceleration riders covering total and permanent disability (TPD) or critical illness. The market is experiencing 14% to 15% annual lapse rates, due to a variety of factors – primarily 12%-15% YRT premium increases and a combination of first-year advisor commissions of 100% to 110%, short responsibility periods and significant industry competition on product features encouraging advisors to consider alternatives. These high lapse rates can lead to an anti-selective lapse effect (i.e., healthy lives lapsing while impaired lives renew) and difficulties recovering deferred acquisition costs, all putting pressure on industry profitability.
Canada’s main term life product is level premium term, with T10 being the most frequently selected duration. These policies renew into another level premium term period (unlike U.S. products, where post-level term renewals are generally YRT) with a significant increase in renewal premiums at the term’s expiration.
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