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Tuesday, March 19, 2019 at 11:40am to 1:10pm
Sage Hall, 141
Johnson Graduate School-Management, 106 Sage Hall, Ithaca, NY 14853-6201, USA
Daniel Gottlieb, Washington University
Lapse-Based Insurance (joined with Kent Smetters)
Abstract: Most individual life insurance policies lapse before expiration. Insurers make money on lapsers and lose money on non-lapsers. We study several mechanisms that can potentially account for this pattern and find evidence in favor or two of them: consumers forget to pay their premiums or under-estimate the likelihood of needing money during the policy period. Indirect evidence is consistent with the comparative statics of these models but not competing explanations, including reclassifica-tion risk, present bias, or administrative costs. For more direct evidence, we conduct surveys with new customers and with recent lapsers of a large national insurer. We find that these two explanations account for over half of lapses.