What Does Lapse Ratio Mean?
A lapse ratio, or expiration ratio, is the ratio of policies issued by an insurance company at a certain time that are not renewed compared to the total number of policies issued during that same period. This ratio is an indicator of how well a company is able to retain a healthy number of policyholders.
Insuranceopedia Explains Lapse Ratio
Lapse ratio is expressed as a percentage. Suppose that, at a given point, 100 policies issued by a particular insurance company have lapsed. Of those 100 policies, 80 policyholders choose to renew their coverage, while 20 opt not to. Since 20% of the policyholders don't renew, this translates to a 20% lapse ratio.
There are several reasons insurance companies calculate their lapse ratios. One of them is looking for patterns that will help them find out why policyholders chose to seek coverage from competitors instead of renewing their existing policies. Depending on the results of their analysis of the lapse ratio, companies may re-evaluate the pricing or the extent of coverage provided by their policies.