American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Lapse-Based Insurance
American Economic Review
(pp. 2377–2416)
Abstract
Most individual life insurance policies lapse, with lapsers cross-subsidizing non-lapsers. We show that policies and lapse patterns predicted by standard rational expectations models are the opposite of those observed empirically. We propose two behavioral models consistent with the evidence: (i) consumers forget to pay premiums and (ii) consumers understate future liquidity needs. We conduct two surveys with a large insurer. New buyers believe that their own lapse probabilities are small compared to the insurer's actual experience. For recent lapsers, forgetfulness accounts for 37.8 percent of lapses while unexpected liquidity accounts for 15.4 percent.Citation
Gottlieb, Daniel, and Kent Smetters. 2021. "Lapse-Based Insurance." American Economic Review 111 (8): 2377–2416. DOI: 10.1257/aer.20160868Additional Materials
JEL Classification
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- G22 Insurance; Insurance Companies; Actuarial Studies
- G52 Household Finance: Insurance