One-Introduction 1 Introduction 1 1.2 Motivation for the study 2 1.3 Focus of the study 2 1.4 Aims of research 3 1.7 Methodology 4 1.8 Outline 4 2.1 Literature Review 5 2.1 Introduction 5 2.2 Literatu

Dissertation Title 1 Chapter One-Introduction 1 1.1 Introduction 1 1.2 Motivation for the study 2 1.3 Focus of the study 2 1.4 Problem statement 3 1.5 Objectives of the Research 3 1.6 Aim of research 4 1.7 Methodology 4 1.8 Chapter Outline 4 1.9 Summary 4 Chapter Two- Literature Review 5 2.1 Introduction 5 2.2 Literature review 6 Provide recommendations on strategies to mitigate lapse rates 14 2.3 Summary 18 Chapter Three- Research Methodology 19 3.1 Introduction 19 3.2 Aims of study19 3.3 Research Design and Methods20 3.4 Research paradigm 20

Dissertation

Table of Contents
Title..................................................................................................................................................1
Chapter One-Introduction................................................................................................................1
1.1 Introduction......................................................................................................................1
1.2 Motivation for the study...................................................................................................2
1.3 Focus of the study.............................................................................................................2
1.4 Problem statement............................................................................................................3
1.5 Objectives of the Research .............................................................................................3
1.6 Aim of research ...............................................................................................................4
1.7 Methodology.....................................................................................................................4
1.8 Chapter Outline................................................................................................................4
1.9 Summary...........................................................................................................................4
Chapter Two- Literature Review.....................................................................................................5
2.1 Introduction......................................................................................................................5
2.2 Literature review..............................................................................................................6
Provide recommendations on strategies to mitigate lapse rates...........................................14
2.3 Summary.........................................................................................................................18
Chapter Three- Research Methodology.........................................................................................19
3.1 Introduction....................................................................................................................19
3.2 Aims of study.................................................................................................................19
3.3 Research Design and Methods.......................................................................................20
3.4 Research paradigm.........................................................................................................20
3.5 Study setting...................................................................................................................21
3.6 Population and sample of the study................................................................................21
3.7 Sampling Method...........................................................................................................21
3.8 Construction of the instrument.......................................................................................21
3.9 Data Collection...............................................................................................................21
3.10 Data Analysis................................................................................................................22
3.11 Reliability and Validity of study..................................................................................22
3.12 Bias...............................................................................................................................22

3.13 Ethical Consideration...................................................................................................22
3.14 Summary.......................................................................................................................23
Chapter 4- Presentation of Results.................................................................................................24
4.1 Introduction....................................................................................................................24
4.2 Interpretation..................................................................................................................24
4.3 Summary.........................................................................................................................28
Chapter 5- Discussion ...................................................................................................................29
5.1 Introduction....................................................................................................................29
5.2 Summary.........................................................................................................................29
Chapter 6: Conclusion and Recommendation .................................................................................1
6.1 Introduction......................................................................................................................1
6.2 Conclusion........................................................................................................................1
6.3 Implications of the research..............................................................................................1
6.4 Limitations of the study....................................................................................................1
6.5 Recommendation to solve research problems..................................................................1
6.6 Recommendation for future studies..................................................................................1
6.7 Summary...........................................................................................................................1
References........................................................................................................................................2
.........................................................................................................................................................3

Title
“Examining factors affecting lapse rates in the South African short term insurance
industry.”
Chapter One-Introduction
1.1 Introduction
Life insurance is considered as the contractual agreement that occurs between the
insuring party and the insuring company. This means the protection from the calamity that arises
to the insured person. This may be considered in the form of financial protection to the insured
person. This is considered as the risk management that helps the insurer to get protection from
the contingent event or any unforeseen loss that may occur to them (Stevens, 2017). Here the
insurance provider promises to pay to the insured dependent an amount of money which is
known as sum assured on occasion of any causality or death. For availing this service the insured
person or his well wisher who is having a interest in the life of the person can pay the amount on
his behalf. The insurance provider provides a benefits of paying a small premiums. The premium
of the insurance policy is calculated by insurance provider by equating the mean value of the
benefits that would be provided to them. It is seen that it is a big issue that is being generated in
the insurance industry in South Africa where there exist a Lapse in the payment of the insurance
policy full amount.
The term lapse in the insurance sector is defined as a cessation of privileged that the
policy holder has due to the passage of time or inaction. This occurs in the insurance sector when
the party to the insurance does not pay his or her obligation for availing the service. This is done
by the insured so as to make a premature withdrawal of the policy. Here the death of the person
is not considered as the matter. Due to lapse the insured person is no longer able to achieve the
benefit that arises to them while they were in contract (Mikkelson, 2016). Hence the lapse of the
policy should be reduced so that people of the country are fully insured to the danger of life loss
during any probability. As it is already been seen in the previous study there are various factors
that influence the decision of bringing lapse in the insurance policy of the insured person this
report would provide analysis of the factors.
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1.2 Motivation for the study
This research topic is one of the most important factor that derives the working of any
country as the people of the country should be insured which would make there loved ones life
risk free. As this study reflects the factors which are important for the people of the country to
evaluate why the lapse of insurance is not good for the family members. As in the country there
is no proper information about the rights and the duties of individuals in the insurance contract
due to which they lapse the insurance policy before the maturity occurs. As the people of the
country are highly affected by the long term insurance practice that insurance providers provide
to them. This study is done so as to make the learner of the study get the knowledge of negative
impacts of lapsing the insurance policy before time. The user of this research would be the
general public of the country who does not have information of the terms and condition of the
insurance (Bloomberg and Volpe, 2018). This research would also help to promote the benefits
that are related to the life insurance. The stakeholders which would get benefit from the study
includes Young age people who are working out of their home and on whom the life of family
depends upon, also the factory workers would be the key stakeholders as there exist a chance of
causality among them. The learners and the scholars are one of the main stakeholders who will
get benefited from the study.
1.3 Focus of the study
This research is based on the factors that affects the Lapse rates in the south African short
term insurance industry. The factors which would make the insurance industry affected would be
discussed here. This would also include impact of the policy holder attributes on the short term
insurance lapse rates. Also the examination of the impact of Macroeconomic variables would be
considered in this report. The main aim of the research is to give the user of this research a
knowledge about the specific factors that determines the lapse of the insurance policy (Akesson,
Braganza and Root, 2018). Also the industrial dimension and the advantages and disadvantages
that are related to entering into the insurance contracts would be discussed. This research focuses
on the people who lapse their insurance policy before time and gets affected afterwards.
However the research will not focus on the insurance industry and the influence that the
insurance provider have on the insured person. Also the wrong practices that the insurance
provider does to sell their insurance products to the customer would not be analysed in the
research.
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1.4 Problem statement
As it is seen in the country there exist a problem of lapse of insurance before the maturity
of the insurance occurs (Black, 2017). This is considered as one of the main problem which
makes the people get hampered and also impacts the nations mortality rate. It is seen that most of
the people in country are living without having a insurance policy or if they had taken the policy,
they have lapsed it before maturity occurs. There exist a chance of misshapenness which is
uncertain due to which the family member of the individual hamper. As if the earning member of
the family dies then other family member who are dependent on him would be affected
financially leaving the family in poor condition. Also it has been identified that the lapse under
certain condition accounts for around 50% of the contracts fair value.
Research is conducted to answer the research questions. It is a fundamental core of any
research project. The research is interlined with look into targets as these are made according to
the foreordained destinations of the exploration. Inquiries assumes a viable part in leading
writing audit with see purposes of different journalists and writers. There are various questions
that this research would answer which includes the following:
 What policyholder features determine short term insurance lapse?.
 What macroeconomic variables influence short term insurance lapse?.
 How do short-term insurers manage lapse?.
1.5 Objectives of the Research
Research objectives are basically what we expect to achieve from a research. The
research depends on the examination points on the grounds that in these different targets are
readied which are fundamentally interlinked with look into title (Biggam, 2015). This give
assistance to the scientist to complete the tasks and exercises of research in orderly way. This
also helps in providing solutions to the problem in the research. There are various research
objectives that are supposed to be considered in the other chapter of this study. These research
objectives includes:
 To examine the impact of policyholder characteristics on short term insurance lapse rates.
 To examine the impact of macroeconomic variables on short term insurance lapse rates.
 To provide recommendations on strategies to mitigate lapse rates.
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1.6 Aim of research
The aim of research is to make known something previously unknown. It is one of the
most critical piece of research venture (Akesson, Braganza and Root 2018). This is because the
entire work and movement of research depend on the title and the point of the examination. It
consist of an issue which should be investigated by inquire about for leading an examination
work. It will also explain a new phenomenon and will also generate new knowledge for the
researcher. The aim of research is stated below:
“Examining factors affecting lapse rates in the South African short term insurance
industry”
1.7 Methodology
The methodology that is used in this report is quantitative research which emphasize on
the objective of the measurements and the statistical, mathematical or the numerical data. Your
goal in conducting quantitative research study is to determine the relationship between one thing
[an independent variable] and another [a dependent or outcome variable within a population.
1.8 Chapter Outline
The research work to be conducted should be presented in an appropriate format. An
appropriate structure for presentation of research work needs to be designed. In present case the
researcher is going to follow the structure mentioned underneath.
Chapter 1: Introduction
Chapter 2: Literature review
Chapter 3: Research Methodology
Chapter 4: presentation and results
Chapter 5: Discussion
Chapter 6: Conclusion and recommendations
1.9 Summary
The first chapter which is the introduction specifies about the problem and also states the
brief information on the problem that the country faces. Here the methodology and which is used
in the study is mentioned and why it is important for the researcher is given. Also this chapter
gives the brief about the motivation that makes the researcher to study the research (Alhassan
and Biekpe, 2016). This chapter would give a brief proposal on the research that would be
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examined on the later part of the research. Also the objective and the question which are related
to the research problems are stated in this chapter of research.
Chapter Two- Literature Review
2.1 Introduction
The literature review is defined as the both the explanation and the summary of the
complete and the current objectives that are defined in the research. These are done with the help
of some of the academic books as well as the journal articles which are available either in the
market or by internet resources. While doing the research it is seen that there are two types of
literature review that can be discussed by the investigator or the researchers. It can be described
as the students paper which is asked by the tutor for doing the stand alone assignment while
appearing in the course and other can be described as the part of the introduction which consist
of a longer work which consist of the thesis or the report of the project (Alhassan, Addisson and
Asamoah, 2015). The purpose of the report or the thesis that are made by the researcher are
based on the research papers that may be used as a primary or the secondary work of another
person. The focus and the perspective of the review that the investor depicts in the report will
help the user of the research to analyse the focus of the researcher. This can be understand
through the process of reading the published literature reviews or the first chapter which are
shown in the dissertation or the thesis. This is the form of review that is based on the articles or
has been done by the researcher himself by using various methods of research. This is also
known as the scholarly paper that has been done to enhance the current findings and which
includes the theoretical and the methodological contribution which is done on a particular topic.
These are considered as the secondary sources which are done by the user and it also includes the
report that does not shows any new or original experimental work. The main type of literature
review includes, Evaluation, Exploratory, Instrumental literature review and the Systematic form
of literature review. The systematic form of literature review is classified separately and is
essentially a literature review that is focused on the research questions (Asah, Fatoki and
Rungani, 2015). This would help in identifying, appraising and selecting the high quality of
evidence for the research to take place.
The purpose of the literature review is to give the researcher to render easy access about
the data of the research objectives by the process of selecting a high quality of articles and the
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studies that are relevant, meaningful, important and valid. This helps in summarising them into a
one single research with the help of which the user of the research would be able to get the
knowledge about the issue that is being discussed. The literature review helps the user to give a
best and absolute starting point for the researchers with the help of which the issue can be
described in best manner. This helps the researcher to not to duplicate the work which has
already been done by any other researcher. This also helps the researcher to find the clues that
where the research is heading. This also helps in highlighting the key findings of the research.
While discussing the literature in this dissertation the researcher made a focus on the
relevant issue that were used to examine the factors that affects the South African short term
insurance industry in the country (Babor and et. al., 2017).
2.2 Literature review
Background of South African Insurance Industry
In the words of Marmus van Heerden, CEO, Pineapple, “the insurance is a beautiful
concept that and is community that is coming together to help each other. Hence along the way
of this we lost touch of insurance the people”
From the analysis of world economic outlook, it is seen that the estimated GDP of the
world in the year 2017 was $2.25 trillion of which around 2.8% is contributed by the South
Africa. The African insurance premiums in the year 2016 accounted for around $60.7 billion or
1.3% of the global insurance premiums. Which is considered as the one of the most significant
figure. But the premiums that are paid by the people of the country represents the an insurance
penetration rate of 2.8% which is considered as lowest in the emerging industry. Although it is
seen that the insurance premiums in Africa dropped more than 15% from the year 2012 to the
year 2016. it has been seen that the South African insurance industry is by far the largest African
insurance market in the world which is generating around $44Bn of the total premiums of he
country. But it is seen that the South African premiums are decreasing day by day as the north
and the east Africa gain is not relevance (Barrett and et. al., 2019). By global standards, Africa’s
insurance industry remains relatively underdeveloped, accounting for just under 1.2% of
insurance premiums written globally. The renewed hope for economic recovery, on the back of
rising commodity prices, together with the continent’s growing young population, rising literacy
levels, and rapid urbanisation are expected to give rise to an increase in insurable lives and
assets. An emerging middle class also points to considerable potential for growth. Property and
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casualty insurance are expected to grow by a compound annual growth rate (CAGR) of 4.3%
between 2017 and 2025, much higher than projections in more mature markets
It is analysed that the share of the South African premiums from the year 2011 to the year
2016 fall from 76% to 69%. it is seen that the short term insurance sector in South Africa has
been slow and to go digital. It is seen that customers and the citizens of the people are willing for
the company to show a digital engagement. For the companies to achieve the objective of
making a good platform and decreasing the lapse rate they should reimagine it. It is seen that the
industry is expected to grow at R115.2 billion by 2020 (Biggam, 2015). by various surveys that
are done by different companies it is seen that short term insurance providers must meet strategic
imperatives to meet the changing customers demands and the leverage of the new opportunities.
These five imperatives that would help the industry to grow are:
 They should be accessible to the customers
 The insurance companies should form a trust among the people so as that they are able to
achieve the objective of maximum profits and the lapse rate may decline due to this.
 The insurance companies must be responsive to the customers feedback and should have
a high rate of payment of dues to the customers.
The data that is seen in the life insurance policy surrender and lapse disclosed the fact
that policyholders accessed R72.6 billion in benefits in 2017 by surrendering their savings
policies. De Villiers says while surrenders are always of concern, it is encouraging that the life
industry reported a 9% decrease in surrenders from 2016. In 2016 life insurers had seen a very
worrying 16% increase in surrenders from 2015.
The South African Insurance penetration is one of the most highest insurance penetration
level as compared from other mature markets in the world. This gives the opportunities to the
people of the country and the companies to have a growth in future. It is seen that the GWP of
the company seems to tell a different story. This has been seen that GWP has rose from the
$15.8Bn in June 2016 to $19.3Bn in the June 2017 (Black, 2018). while the short term insurance
experienced a growth from $4Bn to $4.9Bn.
Literature review
As by the comparison it is seen that South African insurance industry is highly
competitive and more mature, with the diversified multi Chanel distribution models. In recent
years, market regulation has evolved to more restrictive and demanding measures. There are
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concerns that certain competitive aspects of the industry may be lost as a result of some aspects
of the new regulations. Their are various strengths and weakness that are related to the South
African industry, which includes
 Strengths: It is considered as well developed and financially sound market, level of
competition helps the citizens to achieve the best product for their life. Also the industry
has a diversified multi channel distribution model which helps them to achieve the
advantage of giving best and suitable products.
 Weaknesses: There is a huge risk of Over regulation in the companies due to which
people are not able to perform their obligation properly and it raises the percentage of
lapse rate. Also the country is slow to engage in the transformation programmes so as to
address the inequality among the people.
This is seen that the Africa has relatively low population density in the comparison with
the other countries but it has a fastest growing population which helps them to emerge (Black,
2017).
The South African insurance industry is described as a mechanism which helps the
country to reduce the risk that is associated with the life of people. It is seen that if this kind of
risk eventuate in the people of South Africa than it may either patrimonial or no-patrimonial. The
term insurance according to law is a result of man's effort that creates a financial security in the
face of danger to his or her life, person or its estate. It is said that the law in the insurance sector
in South Africa consist of rules that are peculiar to insurance i.e. the rules on the insurable
interest, subrogation and the double insurance, rules which are applicable to all the contracts
terms and the general contractual rules that has undergone the changes in the insurance context.
The South African law is governed mainly by the Roman Dutch law (Bloomberg and Volpe,
2018). The classification of insurance in South Africa has been done as a result of difference that
are underlying the legal principles. The criteria in classifying the contracts of insurance are:
 Nature of the interest of the insured
 Nature of the event of the insured against
 The way of recovering the amount under the which the contract terms and conditions are
determined
 Also it would be seen that how the profits of the insurer would be dealt with.
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The rising literacy levels is considered as one of the driver which affects the lapse rate in
the insurance sector. The rising lapse rate creates more knowledge about the potential buyers of
the insurance and further can empower customers to gain knowledge from the internet and the
social media networks.
Richardson and Hartwell gave a report by presenting a brief history on the study of the
lapse rates that the country has, in their discussion they considered lapse as dependent on the
selling agents “selection of the policy holder and the other prevailing economic conditions” (Noe
and et. al., 2017).
High lapse of life insurance policies is one of the most serious issue that arise in the
market. It is seen that around 20% of the policy holders lapse the policies in the initial year of
existence. It was seen that some of the companies and in some of the product lines the lapse rate
are higher if compared to other products and other companies. If this seen from the perspective
of large base then the lapse rate would be more higher. Due to increase in the lapse rate and due
to financial losses in the product category it is seen that there exist a huge amount of
dissatisfaction with the products that the insured person purchase (Cohen, 2018). It is seen that
when the life insurance contracts gets crystallised then the insurer imagines that the contract of
insurance would go for the longer time period till the end of contractual terms or the policy year.
If the policy holder breached the contract and lapse it then it gives the rise to the risk of life and
the protection against the life insurance of the person gets interrupted. It is seen that the
predecessors of the present day should be insured by the life insurance policy so that they are not
exposed to the risk that are associated with the life of the person. As it was seen that the there is
9
Illustration 1: Comparision of South African insurance market

no to very low entrance in the industry which leads to adverse selection of the policy. Also as
now a days people are aware of the fact that low life expectancy due to which they expects a
high amount of death benefits (Fortes, 2018). Due to such flaws in the insurance terms led many
companies to bankruptcy.
The term lapse is defined as the event were the termination of the policy is done by the
policy holder. It is recognised as the voluntary termination of the insurance policy and the
contract that has been entered between the policy holder and the company. In the context of
conventional life insurance it is considered as the lapse where the insured person or any person
who his paying on behalf of him discontinues the policy before it acquires any of the paid up
value or a surrendered value (Deininger and Xia, 2018). This can be divided into various other
forms which includes the following:
 Full or partial termination of the contracts
 A mere surrender of the policy where cash refund and no refund is demanded by the
client.
 A revivable and non-recoverable contracts.
The life insurance and the pension plans are generally promoted as the long term
financial service of the products where these are used as insurance product for getting the
protection against the life of the individual and the family members. However the shield that the
policy holder has by the insurance policy is upon their will to continue the policy the keep
paying the premiums as and when required, this also helps the policy holder to no to withdraw
the amounts from the policy for fulfilling the intended goals and the objectives. Also they should
not surrender the policy prematurely for the cash value as this gives losses to the insured person.
As it is seen that in the recent years there are different options for investment that are
available to the insurer. This helps the investors to require continuous engagement by the
insurance companies to help them to understand the benefits of the insurance policy and the risk
cover that they are providing to the insured person (Doherty, 2015). As it is seen that there are
broadly three types of issues which are included in it, these issues includes, Premium
persistency in which the premium is received by the insured person on the basis of terms and
condition of the policy. Secondly, Policy persistency where the insured person has not paid out
the premium but the policy is also not lapsed without the value and hence carries forward
accordingly. Lastly it includes where the funds get depleted by the partial withdrawal of the
10

amount at the judgement of the policy holder. If the policy lapses then the policy holder loses his
investment. Their are different reasons or causes of lapse in the insurance sector, which includes
the following:
 Alternate investment options: There are various alternative investment options that are
available to individuals for making investment. As there include the option of investment
of mutual funds, direct equity and other form of investment that which gives monetary
benefits to them. This impacts how the individual looks at the benefits that are available
to the them. As people consider it as one of the most important decision point. As there
are various sources that are available that's why people does not invest in the insurance.
 Customer specific features: It is seen in the past investigation that there are differences in
the experience of early lapse due to various factors (Fitchett, Hoogendoorn and
Swemmer, 2016). There are various other factors that are affecting the decisions of the
people. These factors includes education level, socio economic background of the person,
age factor, gender factor, marital status and many more other factors lapses in the past
have shown significant differences in experience between business coming from rural
and urban socio economic backgrounds. It is possible that to some extent these
differences are attributable to lack of communication, access to service etc.
Lapses in the past have shown significant differences in experience between business
coming from rural and urban socio economic backgrounds. It is possible that to some extent
these differences are attributable to lack of communication, access to service etc. It is seen that
the lower value policies, low sum assured and the instalment premiums have higher lapse ratios.
Also the small proportion of such lapse occurs due to the malpractices, also the policies that are
purchased by the people with the limited resources or from the low income groups are more
prone to lapses. Also the financial difficulty plays a significant role in doing the lapsation of the
policy (Black, 2017). It is seen that the lapse ratio is higher for the policyholder who are in the
younger age group, this happens due to smaller or more uncertain income that they have also
there is lack of appreciation and motivation concepts in the products which includes the risk
cover, family protections and the old age provisions.
 Product design and choices: It is seen that there are various variety of insurance policy
and which the customer buys. This includes that the withdrawal experience would be
considered as different for the different plans (Fortes, 2018). Lapse experience may differ
11

between types of plans depending upon factors such as the needs which are met, term of
the policy and size of premium. As this is seen that the offering that the product offers to
them is considered as one of the most important factor.
It was seen that lowest lapse rate was 11.3%, the medium 13.9% and the high 18.2% for
an aggregate lapse rate over all durations of 14.8%. A surprising result, on the other hand, was
the convergence of mortality rates at high durations in addition to an increasing trend thought to
be related to lapse rates.
Their existed a risk of cyber risk and operational loss data because of which customers
were not able to invest in the short term insurance sector. The directives that were performed by
the data protection directive later gave the impact that people were able to rely on the terms and
conditions and the objectives of the life insurance company and due to this the lapse rate
decreased relatively (Johnson and et. al., 2015).
The macro economic factor of the country also impacts the lapse rate in the short term
insurance sector. These variables includes the employment, income and the inflation levels of the
country. As it is seen that the inflation that the company accounted for in the year 2010 lapsed
around 60% of the policies which was considered as one of the most significant variables. Also
12
Illustration 2: GDP growth of Country

the buyers confidence is also considered as the factor of the lapse, as it is seen in the insurance
sector that the lapse in the policy occurs due to the falling confidence of the users the data shows
that around 40% of the policies gets lapsed due to this factor. The price of the commodity that
the insurance industry provides to the users has declined significantly since 2016. it is also a fact
that South Africa is on a lower economic growth trajectory as compared to the rest of Africa due
to which citizens of the country are not preferring to buy the product of life insurance. This is
seen that real growth in the GDP has not reached only 1.5% in the year 2018 as compared from
the year 2017 (Jones and Muller, 2016). also the elevated inflation between January to March has
eroded the household savings. This is seen that the high level of unemployment reduces the
payment term of the already unequal society. It is seen that the government budget deficits failed
to narrow the gap due to the shortfalls in the tax revenue and it increases the spending on the
debt servicing .
The deflation in the economy of the country causes a risk for the life insurer as it depicts
the low inflationary environments in the country, due to this the interest tends to drop and it
becomes difficult for them to achieve the required investment returns.
As it seen from the factor that the interest rate impacts the insurer profitability and is
considered as similar to those of the inflation. Also these factors helps in determining their
significance which are related to the investment returns of the particular insurance products that
are sold. Furthermore, product features such as being able to withdraw money at any time or the
addition of benefits under the original policy terms all influence the sensitivity to interest rate
fluctuations (Jones, 2017). Despite a global trend towards consolidation of markets and
expansion of larger global insurers into emerging economies, local insurers have outperformed
their international counterparts in emerging economies. With emerging economies share of the
world’s GDP increasing from 21% to 34%, and in parallel total insurance premiums grew by
11% annually in emerging economies, while insurance premiums only grew by 1.3% in
industrialised economies over this period.
The financial sector regualtion act 2017 was also designed help the financial service
which will elivate the two primary regulators, being the prudential authority. The passing of the
twin peaks Bill helped the insurance sector to increase the reliability on the terms of the contract
that were done by the insurance regulators. This also helped the consumers to achieve the
objective of securing the life of the people of the country.
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Also the factor that includes the tax rate of the country makes the user to determine
whether they should invest in the life insurance or not. If there are benefits that are provided to
the people of the country regarding tax then they would get motivated to purchase the short term
insurance policy.
Provide recommendations on strategies to mitigate lapse rates
Lapsation refers to inability to pay premium for renewal of policies. This is the best way
through which individuals are able to continue their policies and enjoys free risk at the time of
danger. But there are possibilities that individuals are not ale to pay premium on time, which
results in breach of contract. This situation is not relevant for insurance industry and customer
too. There are different reasons due to which individuals lapse their insurance policies. This
gives negative impact on performance of insurance company (Meagher, 2018). There are some
issues such as dishonesty, higher risk, hidden policies, more rules and regulations at the tome of
requirement. Insurance is the secure concept which is planned to secure future. This is the way
through which individuals feels that there is requirement of some changes which is relevant for
making future safe and secure. But as per research, it is found that people of South Africa breach
their contract in between due to different reasons.
There are possibilities that some individuals face personal issues such as lack of financial
resources, improper planning related to finance, irregular income, lack of knowledge about terms
and conditions of insurance policies, etc. These are the some issues which affects operations in
negative manner. Hence this make bad impact on operations of insurance company. This affects
their operations in negative manner because people are not willing to provide their premium on
time.
 There are many changes taking place in insurance policies because of change in legal
laws and regulations. Hence these changes must be communicated to customers, so they
are aware about alterations. When customers are aware about changes, then they are
motivated and ready to pay premium on time. Policies of premium are paid on regular
basis. This helps to maintain long term relations with consumers. But this can be done
with motivating consumers with regular discount offers.
 There must be use of different policies which helps to provide satisfaction to consumers
and they are ready to pay premium on regular basis.
14

 There must be regular customer service which helps to provide satisfaction to consumers
when they want some accessibility related to services. For instance: customer have some
issue related to repayment of premium then, in this case if there is proper customer
service, then they are able to resolve their grievances (Mikkelson, 2016).
 There are many clauses which are not revealed properly by clients. So in this case, it
affects satisfaction of consumers. Hence in order to deal with it, there must be proper
change in plans and policies which is significant and relevant to provide them complete
information regarding proper terms and conditions.
 Customer relations are the most crucial aspect which helps to get positive impact because
of change in plans and policies. Insurance organisations must have policies which is
relevant for making operations fruitful according to change in policies. There must be
proper communication technique which helps to reduce communication gap between
consumers and company.
With the help of above mentioned recommendations, there is ease in performing
operations which is significant and relevant for reducing lapse rate of insurance policies. When
consumers are not satisfied with services, then they do not want to continue with these services.
According to Ian Horsham there are some measures which has to be used by insurance sector in
order to provide satisfaction to consumers. Some recommendations are as under- Personal services- There must be personal services to consumers through which they feel
comfortable in sharing their thoughts. This helps to understand their mindset and in case
of any grievances it must be resolved. This helps to make positive change in behaviour of
consumers because in case of any issue, they can easily contact with insurance help line
number and resolve it. There is difference in demand of consumers regarding insurance
policies such as family benefits, children education, career planning, future benefits, etc.
This helps to get customised services and they feel that their money is invested according
to their requirement (Needham, 2018). With customised services, consumers of insurance
sector has greater choice which helps to continue with insurance policies. When proper
services are provided to consumers, then it is easy to provide option with more benefits
and resolving issues faced by consumers. When consumers are valued, then it is easy to
understand changes in behaviour of consumers.
15

 Proper communication technique- Communication is one of the important aspect which
helps to retain consumers for longer time. It is important and significant to provide best
communication technique such as blogs, CRM systems, social media, personal touch, etc.
which helps to provide complete information about consumers. Sometimes consumer
breach insurance contract because they are not secure regarding their personal
information. So with regular contact with consumers clients of insurance sector must
provide environment of confidentiality so they are confident regarding their information.
There must be use of digital technology with the help of which consumers can access
their status at any time. This helps to provide satisfaction to consumers because they have
information when they want to access it. In case of any change in policy, immediate
instruction related to it must be communicated to consumers (Noe and et. al., 2017). In
insurance sector, there is a quote that relationship is equal to revenues. So it is important
to use proper communication technique through which regular contact with consumers
can be made. Easy redemption- Redemption refers to withdrawal of money which is invested with
insurance company. Insurance is the provision which is reserved for the provision of
emergency. So if there is problem in redemption of money, then in this case consumer
may feel that this will not work in dander and they breach the contract. Apart from this
there must be element of gifts, discount on premium, etc. which is relevant for
maintaining long term relations. Hence there must be some monetary benefits which
helps them to provide them bes deal under insurance contract. Fast resolution of consumer grievance: Insurance is the sector in which consumer invest
their money so in case many issue, it is responsibility of managers to deal with it quickly.
This is the concept which helps to provide satisfaction to consumers. Sometimes, there
are some myths related to insurance policies, so in this case it is responsibility insurance
company to clear it and up date at their site, so more and more people can access it. e-
mails are the main source through which consumer share their grievance, hence regular
check on e-mails helps to acknowledge about issues faced by consumers. With regular
solution of grievances, it is easy for insurance firm to expand business at global level. Transparency and honesty- In insurance sector, there are many terms and policies, so in
this case, these policies must be communicated to consumers (Permadi and et. al., 2018).
16

When terms and conditions of insurance are clear to consumers they are satisfied
regarding benefits and offers of company. This helps to creates trustworthy relationship
between consumers and insurance company. As there are many changes taking place in
external environment, so in this case insurance company has to launch new and
innovative approaches which helps them to invest and get best return out money invested.
With new policies as per consumer demand, consumer feels like insurance option is safe
and provides more benefits. This reduces the rate of breach of contract (Walsh and et. al.,
2017). Measure lifetime values: Insurance is the sector which consumer takes as life time
benefits. Hence when marketing of insurance policies, there must be complete
information regarding life time benefits. This helps to attracts consumers and they prefers
to pay premium timely because there are many benefits which are fruitful because of this
payment. This must be done after analysing demand of consumers. Advertisement must
be according to plan. For instance: insurance policies is related to future plans or
retirement benefits, then in this case there must be television advertisement, online ads
which helps to provide relevant information to consumers and they gets convinced to be
part of insurance (Stevens, 2017).
 Don't over promise- There are many advertisement which provides guarantee related to
provide specific benefits. In this when consumer invest by analysing such advertisement
and they do not get such benefits. In this case, brand image of insurance policies goes
down. So insurance company must never over promise related to returns and benefits.
There are many offers which makes consumer attracted to invest in insurance. But due to
lack of proper planning regarding finance consumer breach the insurance contract. So
with proper disclosing plans and policies and discount offers, planning related to it can be
done. When some offers are launched by insurance company for some specific period,
then in this case this point must be disclosed properly to consumers. This helps to
enhance their knowledge about offers and they plan actions accordingly.
From the above discussion, it is clear that with following above points, it is easy to
maintain long term relations with consumers. This is because they are aware bout actual facts
and hence they plan operations and financial resources accordingly. So this helps to reduce lapse
17

rate of insurance policies. This helps to improve condition of insurance sector in South Africa
(Titmuss, 2018).
2.3 Summary
This has been analysed from the above review that insurance industry is considered as
one of the main industry in the world. People in the country are affected by the variables that
impacts the performance of the company. It is seen that insured person lapse the policy due to the
macroeconomic factors that affects the countries insurance industry the most. Also the design
and feature of the product are considered as one of the most important factor that influence the
decision of the insured person to lapse the insurance. It is also seen that there are different
options that are available to the people to invest in, these are more profitable and approaching to
the people of the country. So this would also be the factor that impacts the lapse of the policy.
The countries GDP and the financial condition of the insured person also affects the insurance
policy to be paid till the end of the contract (Tladinyane and Van der Merwe, 2016).
It is also seen that by bringing the change in the way the policy are sold to the user and
implementing the ethical practice in selling the policy to the users would help them to achieve
the targeted profits. Also the countries GDP is not as good as compared from the other countries
which is a dominating fact for lapse in the insurance sector. The companies in the insurance
sector are not having the technological analysis and are not able to work as per the requirements
of the people of the country due to which the lapse rate is increasing every year. Also the option
which helps them to invest in other form gave the user benefit of achieving the desired profit as
required by them.
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Chapter Three- Research Methodology
3.1 Introduction
This is the part of the research where the research methodology that is used in analysing
the data so as to complete the research in effective way is being done. This is the section that
helps the researcher to identify the manner in which the research is being conducted. It is done
through application of different techniques and methods from which investigator is able to draw
a valid conclusion. It is seen that the research in the common parlance is done so as to search for
getting the knowledge. As per Clifford woody, “ Research comprises of defining and redefining
problems formulating the hypothesis or the suggested solutions which collects, organise and
evaluate the data. Hence it is important for the researcher to decide as to appropriate techniques
and the methods so as to conduct the research in effective manner. This has been seen that the
range of methodologies and models are through scholars from time to time which helps the
researcher to complete the objective of research in best manner. Also the techniques and the
methods which are suitable to the study into the consideration are decided in this section of
research. Hence the section of research methodology is highly important and it sets the
guidelines for the researcher to take place. It is seen that the research is an academic activity
which should be used in a technical sense. While conducting the research there are various steps
that are taken into consideration which includes choosing the topic, developing the research
question, writing the research proposal, creating a research plan, procrastination, realistic
planning, collecting data making pilot studies and giving the summary about the results that were
discussed in the research. The research divided into different methods which includes the
qualitative research methods and quantitative research. In this research proposal the method
which is used is quantitative research method which helps the researcher to get statistical data to
analyse the situation of lapse rate in insurance sector in South Africa.
3.2 Aims of study
The aim of the study is considered as broad statement that describes the outcomes of the
research. This is considered as the general outcomes of the research which helps in painting the
picture of the research project. It emphasises what is to be accomplished in the report. It also
helps in addressing the long term projects outcomes which should reflect the aspirations and the
19

expectations of the research topic. The questions that are related to the research are considered as
follows:
 What policyholder features determine short term insurance lapse?
 What macroeconomic variables influence short term insurance lapse?
 How do short-term insurers manage lapse?
3.3 Research Design and Methods
The research design is considered as the emphasis that identifies the ways through which
the research is to be conducted. There are different types of research design that are taken into
consideration so that descriptive, exploratory and experimental analysis can be done. It is seen
that the descriptive design emphasis on presenting the research through the detailed description
which is done through the existing facts and the figures. While the exploratory research on the
other hand emphasises on investigating new concepts and the models. At last the experimental
design is considered as method where the scientific or the mathematical analysis of the problems
that are related to the research are done. The present study is related to the lapse that occurs in
the insurance sector due to which the short term insurance is hampered in South Africa. Though
the descriptive design is taken into consideration for this research which helps to provide the
details analysis of different aspect which is related to the current field.
The method that is used in this approach is mixed method. As the research is based on the
qualitative and the quantitative method. This would help the investigator to perform the research
more effectively and this would give most satisfying outcome for research question.
3.4 Research paradigm
The research paradigm is defined as the small example or the pattern that are used to
illustrate the procedures, processes and the theoretical points. According to the definition that is
given by Thomas Kuhn's it is the underlying assumptions and the intellectual structure on the
basis of which the research development and the field of inquiry is based upon. The research
paradigm can be defined into two different forms which includes the positivist approach and the
naturalist approach. The positivist approach is dependent upon the reality of the single, tangible
and the fragment able approaches. Also this approach is based on the concept of dualism.
Various time and context free generalisation are considered as main concepts of this approach.
Here the enquiry is value free.
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While as a naturalist it is seen that realities are multiple and are constructed or holistic.
Also in this approach only time based and the context based working hypotheses are possible.
Here the inquiry is value bounded.
3.5 Study setting
3.6 Population and sample of the study
A sample can be defined as a small group of persons that are chosen either on biased and
unbiased basis from a large population. The reason behind choosing a sample is to take feedback
of such respondents and gather data more appropriately, for taking their opinion to address
research problems.
3.7 Sampling Method
Sampling is considered as one of the most important part of the research methodology. It
is used by the researchers for selecting a small sample from total population. It is fact that,
population is very large and this is not possible for investigators to study the entire population.
Thus, sampling is a small sub set of the large number of the group. The reliability of the research
is depended on the outcomes of the research study. There are two types of sampling which are
portability and non-probability. Here, within probability technique sample is chosen on random
basis where each participant of large group get chance to being selected. While under non-
probability technique, respondents are chosen on non-random basis. In this present report,
researcher has used probability sampling in which simple random sampling is taken to choose a
sample. Scholar has make use of questionnaire which will be used when conducting interview of
a sample population. Here respondents are classified as policyholders, age group and different
sectors.
3.8 Construction of the instrument
3.9 Data Collection
Data collection is also an essential part of a research that helps in obtaining reliable and
valid data for conducting an investigation. It defines as a systematic process to collect the
information from various authenticate sources, for addressing the issues mentioned within a
particular research. Therefore, it refers to a vital part of study that helps in conducting a research
more appropriately. Data in this regard can be collected by using two main methods viz. primary
and secondary methods, where both provides various techniques to address research question.
21

Here, primary data can be collected by the efforts of researchers through self-conducting
interviews, questionnaire survey, focused group discussion and more. This would provide
authenticate and reliable information which is not used before in any past research. Other than
this, data collected through secondary methods can be obtained at large scale by using books,
journals, scholarly articles through internet access. But data collected from secondary sources are
less reliable as well as not so authenticate. In this present research, research has collected the
data from primary sources. Scholars have explored various articles from internet source to
conduct literature review and develop questionnaire to ascertain influence of factors on short-
term insurance policy lapse.
3.10 Data Analysis
It is also considered as one of the most important part of research study, where specific
information is gathered to analyse a data and draw valid conclusion accordingly. Data analysis
can be defined as a process that logically applied to a statical research to describe as well as
measure the information to check its feasibility and reliability. Hereby, scholar also get
opportunity to make appropriate decisions by data analysis to address research problems in
ethical manner. Data can be gathered by using primary and secondary techniques as per
requirement of research. In this present research, researcher has used both primary and secondary
resources to collect data to examine factors that affects lapse rates within South African short
term insurance industry.
3.11 Reliability and Validity of study
3.12 Bias
3.13 Ethical Consideration
It refers to most important of research where researchers must possessed knowledge
about ethics while conducting their research. By concerning on such adherence, they can
maintain reliability as well as validity of research in ethical manner. It is also considered as
initial steps where scholars must focus on seeking consent of participants while collecting
primary data, for their involvement in the same. Under this present research, scholars have seek
consent of entire respondents on paper where terms and conditions of research are mentioned in
order to protect interest and personal information of them. Apart from this, secondary
22

information has also obtained by taking approval and permission from related authorities to
copyright the data.
3.14 Summary
23

Chapter 4- Presentation of Results
4.1 Introduction
Under this section, the above stated methodological tools have been applied in a real case
scenario. This section helps the researcher as well as readers organize the data in a meaningful
manner ensuring achievement of goals of the research. Additionally, this section provides a
summary of the problem being researched, the methodology applied and the inferences drawn
from the results generated. It is more focused on the actual research carried out by the
methodologists rather than explaining the prior research work conducted by other scholars. The
results derived in this research proposal are based on descriptive as well as inferential statistical
techniques. As per Weiss and Weiss (2012), Descriptive Statistics provides a summarised form
of information regarding the characteristics observed in the entire sample of a population. Some
of the measures employed under this gambit of statistics are central tendency, variability and
dispersion. On the other hand, Inferential Statistical, as the name suggests, uses sample to make
inferences by critically examining each sample value. It is used where the population size is large
and it is not possible to study each data value present in that data set.
4.2 Interpretation
In this research proposal, both descriptive as well as inferential statistical methods have
been used to analyse the underlying factors affecting the lapse rate in short-term insurance sector
of South Africa. As per the study conducted, the main factors that were identified as responsible
for impacting lapse rates were:
 Alternative investment Options.
 Customer Specific Features.
By conducting various statistical tools of descriptive statistics, the following results were
derived in terms of Range, Minimum, Maximum, Mean, Standard Deviation and Variance. Here,
V2 denotes Age of the Policy Holder; V5 denotes Policy start date; V6 denotes Policy End Date;
V7 denotes Policy Duration; V8 represents Policy Premium paid by the holders on such short-
term insurance policies and V9 represents Sum Insured.
24

Descriptive Statistics
N Range Minimum Maximum Mean Std.
Deviation
Varia
nce
Statistic Statistic Statistic Statistic Statistic Std. Error Statistic Statistic
V2 29031 70 21 91 49.89 .070 11.910 141.849
V5 29031 2099 41182 43281 42514.75 3.702 630.734 397825.030
V6 29031 2314 41182 43496 42879.14 3.182 542.242 294025.987
V7 29031 70 1 71 26.47 .124 21.107 445.514
V8 29031 2066 103 2169 248.47 1.037 176.659 31208.538
V9 29031 1035800 5350 1041150 193097.65 1302.560 221936.456 49255790305.014
V14 29031 45193 0 45193 7715.00 49.486 8431.639 71092534.503
Valid N
(listwise) 0
The Column 'N' of this table indicates the number of non-missing or valid values. This
indicates that the number of observations utilised while carrying out the current analysis. It is the
number of valid observations that are available for the given variable. One can observe that for
V2, age, the number of observations used are 29,031. Here, the total number of observations
includes both non-missing values (N) as well as missing values. For V2 (Age), the minimum age
of policyholders is ascertained at 21 while the maximum age of the policyholders is 91. The
'Range' column is the difference between the maximum and minimum values for each
independent variable. Hence, for V2, the age of policyholders ranges between 91 and 21 years,
thus, giving us a difference of 70.
Mean is the average value present across the observations. Here, the Mean has been
further divided into two parts viz. Statistics and Standard Error. Here, the statistics for V2 Mean
is 49.89 with a standard error of 0.070. This explains that there is 7% probability of variation in
the given statistic of mean attributable to the age of policyholders. It is important to note that the
mean value depends on the number of large or small values present in the data set. For V9, Sum
Insured, this value is as high as 193097.65 since these observations contain maximum monetary
value of the policy for which the insurance has been undertaken by the policyholder. It is only
sensible to say that the standard error also increases with an increase in mean statistic.
Standard Deviation is the measure of dispersion from the actual values. It is the square
root of Variance. On the other hand, variance is the measure of variability that aims to check
how far the variables are from each other. Here, V2 has a standard deviation of 11.91 which
states that the age of policyholders is widely dispersed from the mean of 49.89 years. This is
25

more meaningful than Variance since variance generated here is a product of corrected Sum of
Squared distances of data values rather than index itself which is not of much use for this
analysis.
In order to have a detailed analysis of Variance, ANOVA has been taken into
consideration which indicates sum of squares, degree of freedom (df), Mean Square and F-
values. This table helps in understand how different combinations of factors affect or create
variability and affect the lapse rate for insurance sector in South Africa.
ANOVA Table
a,b,c,d,e,f,g,h
Sum of Squares df Mean Square F
V5 * V2 Between Groups (Combined) 599882429.39 68 8821800.432 23.335
Within Groups 10948978180.79 28962 378046.343
Total 11548860610.18 29030
V6 * V2 Between Groups (Combined) 224627149.36 68 3303340.432 11.511
Within Groups 8310947264.54 28962 286960.406
Total 8535574413.89 29030
V7 * V2 Between Groups (Combined) 671760.31 68 9878.828 23.334
Within Groups 12261497.72 28962 423.365
Total 12933258.02 29030
V8 * V2 Between Groups (Combined) 25928647.40 68 381303.638 12.548
Within Groups 880055196.37 28962 30386.548
Total 905983843.77 29030
V9 * V2 Between Groups (Combined) 32653690393028.20 68 480201329309.2
38 9.954
Within Groups 1397241902161520.00 28962 48243971485.44
7
Total 1429895592554550.00 29030
V14 * V2 Between Groups (Combined) 26883211469.61 68 395341345.141 5.621
Within Groups 2036933065158.86 28962 70331229.375
Total 2063816276628.48 29030
From the above table, it can be observed that each column has a between groups and
within groups row that indicates the weights given to these values combined as well as
individually. For V5*V2, that is, the age and the policy start date, sum of squares of data values
is 599882429.39 (Combined) and 10948978180.79 (within groups). These are taken as
Regression and Residual Statistics respectively. Hence, one can say that when age factor and
26

policy start date are taken into consideration the relationship between the two is strong.
Therefore, they are likely to affect the lapse rate. Lapse rate talks about the termination of life
insurance before the policy end date occurs due to various reasons such as death or failure of
premium payments made. The degree of freedom of the combined variables is 68 whereas
residually it is 28962 giving a total degree of freedom of 29030. Therefore, it can be said that for
between groups, only 68 statistic are free to vary while within the group this statistic is highly
variable without violating the constraints imposed on it. This indicates that both age and policy
start date are highly variable residually whereas the two are not able to impact much on the lapse
rate when combined. Note that almost all combinations, when used between groups, are not able
to vary as much as they would if they were allotted within the groups signally that there are more
violations bound to occur when more than one underlying factor of lapse rate is happening at the
same time. Hence, lapse rate are likely to increase as there are more number of factors are
affecting each other simultaneously.
The mean square is the product derived after dividing Sum of Squares by their respective
degree of freedom values. It is the risk function containing both variance as well as the bias.
These indicate the accuracy with which the observations are able to predict the parameters. Since
every study includes a certain degree of bias, it is not possible to have a zero or negative mean
square value. Lastly, the F-values have been calculated using these Mean squares to understand
the statistical significance of the observations taken into consideration. Taking a confidence level
of 95%, it can be inferred that policy duration (V7), age (V2) and policy start date (V5) hold the
most significance in the related study. Therefore, they are the main factors affecting the lapse
rate occurrences in short-term insurance sector of South Africa.
27

This figure indicates a bell-shaped distribution for the factors taken into consideration for
the study, hence, showing that there is a normal distribution present in the given data set. The
highest point shows the mean value of 1.9, a standard deviation of 1 with number of observations
coming to 29033. Since the factors are closely tied to each other it can be inferred that no factor
is able to impact the lapse rates singularly, they are only effective when more than one occur, as
was proved true in the ANOVA Study above.
4.3 Summary
28

Chapter 5- Discussion
5.1 Introduction
This part of research summarise the entire information in a precise manner, which is
obtained by using various methodologies. It would help other researchers in analysing what has
been investigated through other project-makers. The reason behind making discussion on a given
topic and data obtained by conducing primary and secondary research, is to make valid
conclusion on given research problems. This would help in obtaining outcomes and achievement
of main objectives in given period of time. Along with this, it also aid project team to interpret as
well as describe the significance of findings and outcomes in light of what has been achieved. By
addressing research questions, they can also furthermore explain some any new understanding or
reflecting some insights which emerged as a result of findings. In this regard, to make discussion,
it is essential for researchers to link the entire matter with aims and objectives as well as suitable
hypothesis. Through this process, effective recommendations can be made to resolve and
mitigate the mentioned research issues. In context with present research, the main objective is to
identify factors which affects lapse rates on short term insurance industry within South Africa.
For this purpose, literature review has conducted to examine impact of policy makers as well as
macroeconomic variables on short term insurance lapse rates. This would help in providing
recommendation for mitigating the same, more efficiently.
5.2 Summary
Impact of policyholder characteristics on short term insurance lapse rates:
From findings in literature review, it has been analysed that a lapse defines as an event
which includes the termination of coverage by policyholder or insured person. It is generally
happened when if a personal contract regardless of fund, is fully terminated and administered at a
division level, policyholder. It includes the risk of loss as well as adverse changes in insurance
liabilities' value and volatility of policy lapse rates, renewals, terminations and surrenders. As per
opinion of Walsh and et. al. (2017), it has analysed that within life insurance industry, the
contracts are mostly accompanied by risks. Here, lapse includes specifically termination risk
which is considered as the cancellation of a life insurance policy, either by policyholder or
insurance company. It is terminated when policyholder fails to pay premium amount on due date
or after the actual grace period. Therefore, in such case, it majorly impacts on short term
29

insurance lapse rates. In such case, where policyholders exercise rights for terminating a contract
is considered as main issue of increasing lapse rates. The reason behind termination is not
making timely and enough premium payments for covering the expenses of policy. Therefore,
for diminishing such negative effects of lapse, the measured loss is covered under new policy
prices. Through past review of statistical data, it has been analysed that in South Africa-
insurance premium has been dropped by 15% in 2016 as compared to 2012. Due to this fallen in
premium policies, share of South African premiums from insurance market has also fallen from
76% to 69%. In addition to this, it has also evaluated that within this respective country, short
term insurance sector also grows slowly in digitalised manner. Because today people demand for
digital engagement from every company including insurance premium. Therefore, insurance
companies have to digitalised their business for achievement of their key objectives i.e. reducing
the lapse rate. In this regard, providing short term insurance plan help in decreasing lapse rate.
Henceforth, it is estimated that this will the revenue rate by R115.2 billion of insurance industry
by 2020. As per various surveys it has evaluated that short term insurance providers by offering
innovative plans and leveraging new opportunities, can meet strategic imperatives as well. Lapse
influences liquidity and profitability of policy holders in various terminologies. For example-
Insurers might get suffer from heavy losses due to lapsed policies which may happened because
of no premium payment. Along with this, insurer may also faces loss of profits which may get
after maturity of contracts. Similarly, adverse selection of mortality and morbidity, exposure of
liquidity risk in case of forcing policyholders to pay their surrender value to cover many lapsed
policies, etc. are some major issues, faced by insurers. Therefore, at the same time, it leads to
directly impact on lapse rates within South Africa.
As per views of Doherty (2015), it has been analysed that today insurance sector plays
most crucial role in every country, for developing the financial and economic conditions.
Companies dealing in such sector provide effective financial plans and schemes like pension
funds that influence people to make investment in the same, to cover life risk. The increasing
growth and success of insurance markets that covers a large part of entire financial sector, can
affect financial system's stability. In context with South Africa, it has examined that over past
two decades, there has been a dramatic change within financial services, which is provided by
insurance sector. Here, insurance represents a significant share of financial sector, therefore, it
refers as a whole economy also. Insurance companies offer some attractive contracts also such as
30

saving vehicles, company's assets, particularly within life sector. In this regard, ageing
population also contributes to such trend. The financial difference among working people and
retired population have also be managed by insurance companies. This might be a problem
particularly in countries on South African states. Therefore, most of the African countries used to
privatized their pension system and population also intend to purchase products of life insurance,
that turned into long-term saving their life and cover insurance of assets and properties. Hereby,
insurance companies have three separable basic functions, it includes- insurance scheme for
protection to risk to people by transferring risk to institutions, that are able to manage the same in
better manner in exchange for premium. Therefore, this would reflect that insurance sector has
an impact on both individuals and firms' actions. Another function includes risks, that are spread
by selling insurance products to various individuals, for avoiding risks and losses that will occur
due to certain situation. At last, in order to reduce level of risk, insurance companies also
improve resource allocation, by allocating sufficient amount of premium to both individuals and
firms. In this regard, by providing a protection to population against early death, was considered
as a principal role of life insurers in past, where premiums paid as claims through policyholders,
were also influenced by time of death of individuals. But, now a days, there has been a lot of
change has occurred in activities, which are provided by life insurance companies are referred as
more similar like banks' schemes. These kinds of new products of life insurers are basically sold
on the basis of investment features such as liquidity and return. For an instance, universal,
investment and unit-linked contracts are some products that are offered with different investment
characteristics. Within non-life insurance era, nature of such unexpected events as well as level
of damage, mostly influence the amount of claims which insurers have to pay. But in context
with portfolio of policyholder, which is diversified as well large enough, hereby, claims must be
equal to premiums' value.
Impact of macroeconomic variables on short term insurance lapse rates:
As per views and opinion of Meagher (2018), Lapsations can be defined as inability to
pay premium related to renewal of policies. It is considered as the best way by which individuals
or firms are able to continue their insurance policies as well as enjoys free risk at the time of
uncertainty. However, there are some possibilities also may occur where individuals feel unable
to pay premium on time that leads in breach of contract as well. This kind of situation is not
considered as relevant or profitable for insurance companies and individuals too. There are
31

several reasons present due to which individuals lapse their insurance policies. In creates
negative impact on performance of such companies. There are some issues such as dishonesty,
higher risk, hidden policies, more rules and regulations at the tome of requirement. Insurance is
the secure concept which is planned to secure future. This is the way through which individuals
feels that there is requirement of some changes which is relevant for making future safe and
secure. But as per research, it is found that people of South Africa breach their contract in
between due to different reasons. Through perception of Weiss and Weiss (2012), it has been
analysed that there are various elements present in macroeconomic environment, that impact on
short term insurance lapse rates. It includes interest rate, underwriting and catastrophe risk etc.
which are considered as main risks in terms of liability side of balance-sheet of insurers. While
the asset side of same, insurers have to remain vulnerable to risks, which mainly associated with
credit and systemic risk, market and liquidity risk, so on. Therefore, insurance companies in this
regard, have to deal with these types of risks that may threaten their stability in marketplace. On
comparing insurers with non-traditional business, such insurance companies of South Africa that
are based on traditional business, are considered as not so resistant towards financial and
economic changes. However, among the non-traditional business activities that are provided by
insurers, usually belong to insurance-linked securities or financial guarantee insurance.
Similarly, another major factor that impact on short term lapse rates is market risk. It arise from
market movements that put a huge impact on both liability and asset side of balance sheets. In
terms of insurer’s point of view, market risk can be demonstrated as an extent to which value of
asset is not compensated through changes in liability value. These changes are occurred due to
market movements in terms of exchange rates, equity prices, interest rates and more. Hereby, the
main risk for companies dealing in life insurance sector are associated with movements in
interest rates. As this would influence assets and liabilities' value. Along with this, it also affects
policyholders in indirect manner. However, it has also observed that changes in interest rates are
not considered as a main risk of life insurers because duration of non-life insurance contracts is
usually short term. But, it can influence the investment's rate of return. An increase in interest
rates lead to lapse insurance policies due to high expectation of policyholders related to
borrowing costs.
Since duration of liabilities is generally higher than duration of assets, therefore,
companies associated within insurance sector have to face the risk related to reinvestment. As
32

due to market movement, insurers also have faced struggle with less interest rates. Therefore,
major issue in this regard is lower yielding investments, that result to fail insurers to meet the
prior return assumptions. The level of duration that mismatch between assets and liabilities has
also impacted on degree of reinvestment risk, that insurers have to deal with. Furthermore, credit
risk is also considered as one of the main key risks for companies dealing in insurance sector. As
per views of Babor and et. al. 2017, credit risk can be defined as a likelihood whereby a counter-
party fail to meet its obligations. Borrowers, re-insurers, policyholders, brokers, debtors and
more, are considered as counter-parties of insurance company, that affected by credit risk. This
may be arise due to various financial instruments like securitisations, guarantees and more. Other
than this, liquidity risk is another associated risk that impact on short-term insurance policy. This
kind of risk related to inability of insurer in terms of liquidate assets, when it is necessary to
fund its obligations when they are due. Therefore, all such issues and risks, are lead to increase
lapse rates that impact majorly on short-term insurance.
Strategies to mitigate lapse rates
According to view point of Mikkelson (2016), it has analysed that due to certain
possibilities like lack of financial resources, lack of knowledge about terms and conditions of
insurance policies. improper planning related to finance, irregular income and more, that create
problems for individuals to pay their premium of time. This would lead to enhance lapse rates
which directly impact on operations of insurance company in negative manner. Along with this,
there are many changes also take place in insurance policies due to change in laws and
regulations. Therefore, to mitigate lapse rates, insurance companies of South Africa and other
countries to communicate to these types of changes in policies and any legal modifications to
customers, so that they can become aware about such alterations. In this regard, it will give time
to insurers to think how to pay premium on time, which would lead to reduce lapse rates. This
may help in paying policies of premium on regular basis and make able to insurance companies
to maintain long term relations with consumers. But for this purpose, insurance industry also
need to concern on motivating and encouraging customers to pay their premium on time, by
offering them attractive discounts on regular interval of time. By developing different policies,
companies can gain high satisfaction of consumers and can motivate them to pay premium on
regular basis. Furthermore, by resolving complaints of customers related to repayment of
premium and grievances, aid insurance companies to satisfied them and reduce chance of policy
33

lapse. Since insurance companies sometime fail to create transparency in business by not
revealing certain clauses to their clients. Therefore, in such case, it results to get dissatisfaction
of consumers and decrease customer engagement also. To deal with mention condition,
insurance companies must create proper change in policies and insurance schemes, which are
more significant as well as relevant to create transparency in business by providing entire
information related to terms and conditions to people. Hereby, customer relations are also
considered as the most important aspect, that helps to get positive impact on insurance
companies, due to change in insurance plans and policies. Therefore, by adhering such policies,
policyholders can make necessary modifications in plans which prove fruitful to gain high
revenues and customer satisfaction. Along with this, companies must develop a proper
communication system in order to reduce communication gap. All such strategies help insurance
companies in decreasing rate of short-term lapse rate.
34

Chapter 6: Conclusion and Recommendation
6.1 Introduction
6.2 Conclusion
6.3 Implications of the research
6.4 Limitations of the study
While conducting research several limitation is face by the research such as time duration
because concept of insurance company is wide which require proper time for conducting
research. Time management play important role in achieving goal and objective of research in
effective manner. It is necessary to divide time within each and every activity of research for
conducting them in better manner but due to wide concept of insurance this became difficult for
investigator person. Along with this, it is not easy to excess data of insurance company because
there is requirement of taking permission from legal bodies which is not easy task as well as
have proper process that will be time consuming.
6.5 Recommendation to solve research problems
6.6 Recommendation for future studies
6.7 Summary

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