Calculating lapse rates in German private health insurance

Abstract

Many health insurance products in the German market are calculated using life insurance techniques, implying that individual ageing reserves are built up in order to avoid systematic premium adjustments depending only on the policy holder’s age. This kind of calculation is a legal requirement for tariffs that are designed to replace compulsory health insurance. 

The ageing reserves are determined individually for every policy. Remaining ageing reserves of terminated contracts (either by cancellation or death) are credited to the reserves of all the remaining policy holders. This is taken into account when calculating the premiums making assumptions about lapse and death rates depending on age. Since 2009, policy holders can transfer a part of their ageing reserve when moving to a different private health insurer. 

Traditionally, lapse rates have been expressed as the fraction of policy holders who would cancel their contract within one year, depending on their age. These lapse rates typically decrease rapidly as a function of age, because pre-existing medical conditions make it more difficult or even impossible to obtain alternative health insurance elsewhere. In addition, as most of the ageing reserve is typically lost from the customers point of view, a cancellation becomes increasingly expensive for the policy holder the longer they have already been insured. Hence, the lapse rates would best be expressed as a function of the policy holder’s as well as the policy’s age. However, two-dimensional lapse rate cannot be used for calculation purposes as this would possibly result in lower premiums for new business compared to existing policy holders of the same age, which is forbidden by the German insurance supervision act (§ 146 Abs. 2 VAG). 

Alternatively, lapse rates can be expressed as the fraction of the ageing reserves that is released due to cancellations during one year, depending on the policy holders’ age. The use of this kind of lapse rate statistics is considered state of the art for most applications in health insurance premium calculation. The German supervisory authority BaFin publishes reserve-based lapse rates exclusively since 2021. 

In this paper, we discuss lapse rates, their application in premium calculation and available data sources from a general point of view and we provide detailed guidelines for the derivation and validation of reserve-based lapse rates appropriate for premium calculation – based on empirical observations or on the official statistics.

Professional standards of practice are DAV publications that – together with the rules of professional conduct – set out the fundamental principles for the correct practice of actuarial activities. Professional standards of practice are characterised by their 

• treatment of specialist actuarial and professional issues,
• fundamental significance and practical relevance for actuaries,
• professional legitimisation through an implementation process that allows all actuaries to be involved in such implementation,
• correct application, with members being professionally safeguarded by a disciplinary process.

The professional standard of practice „Festlegung von Stornotafeln (Calculating lapse rates in German private health insurance)“ is a guideline. Guidelines are professional standards with regulations that, except in justifiable individual cases, may not be deviated from, and which standardise specific questions.