Individual life insurance lapse rates have stabilised over the past three years, according to research house Dexx&r.

In September last year the rate peaked at 15.6%, but it fell back to 15.4% in the 12 months to September 30 this year.

Dexx&r has examined lapse rates dating back to 1985 and uncovered a four or five-year cycle.

Economic conditions and book demographics are factors.

“Older policyholders are more likely to discontinue or reduce cover as premiums increase with age and their need for cover reduces,” MD Mark Kachor said.

Movement of clients from legacy products to newer offerings also affects lapse rates.

“For these reasons, discontinuances are never zero and, over the long term, lump sum attrition rates vary between a low of 11% and 16%,” the research house said.

The lapse rate for income protection business fell from 16.2% in September last year to 15.7% in September this year.

“There is a long-term trend of increasing discontinuances in the income protection market,” Mr Kachor said.

This is due to the higher proportion of self-employed and small business policyholders, who are more exposed to economic conditions and business failure. Ongoing premium increases and less generous contract terms are also driving lapse rates in this market.

“Replacement activity in the disability income market is more likely to involve substitution of a lower-cost, basic product for an existing, more fully featured product… or replacement of an outside-super product with an inside-super product to improve the client’s cashflow position,” Mr Kachor said.