Asteron managing director David Carter says lapses and unprofitable policies  are a huge problem for the insurance industry.

According to his numbers, a 1% increase in lapse rates means premiums have to go up 5% to compensate for the loss of business.

Lapse rates have been rising and this is partly due to affordability and, to some extent, adviser behavior.

For a life company there is a significant impact as so many of the costs are incurred in getting the business on the books and it takes years until a policy is profitable. These costs include commission, underwriting and other business expenses.

Carter says the most expensive lapses are policies which have been on the books for a long time, such as 15 years, and get cancelled for economic reasons.

But for policies that are between three and five years old, lapses are sometimes because potential increases in premiums have not been clearly explained. The other common reason is churn.

Carter says there is a small number of advisers who are “proactively reviewing business, with good intent or not, and that business is moving around”.

One of the worrying things, he says, is that policyholders are cancelling their policies around the time they are likely to make a claim.

Carter says level premium policies will make insurance more affordable for policyholders and  there are also benefits for advisers building their businesses.

Level premium policies tend to stay in force longer than stepped premium ones.

He produced a graph at the company’s Auckland roadshow that showed if a policyholder took out a level premium policy rather than stepped premium they would save 60% in premium costs.

Currently around 20% of Asteron’s book is in-force level premium business. Carter says it will take time to change this, but he would like to see level premium business grow to 50% of new applications annually within a couple of years’ time.

Carter says the move away from stepped to level premium is “a more sustainable model” for insurance, including life companies, advisers and policyholders.