Modeling lapse rates with economic variables: The vector autoregressive model approach

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April, 2016
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Life insurance contracts are accompanied by risks. This study focuses on the risk involving termination of life policies by the policyholders. This study seeks to identify the main determinants of lapse rates in the Ghanaian life insurance industry. The data available span from 2006 to 2014 and were recorded on monthly basis. Literature research on predictive modeling of lapse rates in the insurance industry led to the choice for predicting with a VAR Model. A total of ve (5) variables were analyzed on their relationship with the average lapse rate. Of these variables in ation, stock market return and interest rate proved valuable for modeling. The vector auto-regression (VAR) model was used to capture the evolution and the interdependencies between the variables. All the variables in the VAR were treated symmetrically by including for each variable an equation explaining its evolution based on its own lags and the lags of all the other variables in the model. The main limitation of this research was the small amount of data and their level of detail. Since the results of this research are promising it is recommended to extend the research to other parts of the country. To increase the statistical strength and accuracy of the inferences that can be made it is also recommended to examine the lapse rates at a policyholder level.
A thesis submitted to The Department of Mathematics, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the award of MSc. Actuarial Science,