Predicting persistency in an uncertain world

Lapse risks in Ireland’s shifting economy

Ireland’s economy continues to grow, with low inflation and strong tax receipts — but risks remain. A small number of firms drive much of our output, employment and revenue, making us vulnerable to global shocks. Life insurers must ask whether their lapse assumptions reflect today’s uncertainty, especially when recent data may not capture adverse conditions.

Risks to lapse assumption setting following a stable period

Evolving risks and uncertainties present real challenges for Ireland’s domestic life insurers as they set lapse (persistency) assumptions, whether for valuation, pricing or growth forecasting.

Our annual domestic life insurance assumptions survey shows that life insurers have experienced relatively benign lapse rates in recent years. On average, survey participants use five years of data to set their lapse assumptions. This means there’s a risk that truly adverse lapse experience, such as the significantly higher rates seen after 2008, may not be reflected in the data currently used by life insurers.

Survey participants indicate that they apply actuarial judgement to allow for ‘events not in data’ (ENIDs), as required under Solvency II. However, determining the right level of allowance is more challenging in uncertain environments, especially when experience data is limited to more recent years.

Level term assurance: an example

We have reviewed industry lapse experience for Level Term Assurance (LTA). The graph below presents the average lapse rate for LTA, based on survey participants’ responses dating back to 2008. This data shows that recent lapse experience averaged less than 5%, while it peaked at around 12% — approximately 2.5 times higher — between 2009 and 2012.

These figures highlight the potential impact on lapse rates if Ireland’s economy were to experience a significant downturn, whether through reduced tax revenues, increased unemployment or other factors.

Unemployment is widely recognised as closely correlated with lapse experience. In fact, several survey participants use unemployment figures to help predict future lapses. The graph below overlays the Irish unemployment rate since 2008, illustrating this connection. Comparable patterns between unemployment and lapse rates were also identified across other product categories in our survey results.

The future?

Despite growing global economic uncertainty, Ireland’s labour market remains resilient, with only a slight increase in the seasonally adjusted unemployment rate in July. With unemployment still below historic averages, life insurers may be asking how long this stability will last and whether their assumptions for lapses, and for new business, are robust enough to account for heightened uncertainty.

Key actions businesses can take today

We’re here to help you

PwC Ireland’s Risk Modelling Services team helps insurers navigate uncertainty with confidence. From assumption benchmarking to predictive modelling and regulatory support, we bring deep expertise and practical insight to help you meet your strategic goals. Contact our experts today.