Lapse-supported product
A life policy whose price assumes that some policyholders will drop it, with no payout, before it gets expensive: if fewer lapse than expected, the insurer loses money.
Some level-premium death policies with no cash value, such as Canada's term-to-100 or universal life with level cost of insurance, collect a constant premium while the risk of death rises with age. The insurer can offer a low price because it counts on policyholders who will stop paying: their past premiums fund the claims of those who remain. A lapse is then a source of profit, the reverse of savings contracts, where it is a loss. The risk is that policyholders, better advised or older, keep their policies longer than assumed, or that a secondary market buys them up. The assumption error is lasting and comes to light late, which warrants specific capital requirements set apart from ordinary lapse risk.
The Life Insurance Capital Adequacy Test (LICAT) of OSFI, Canada's financial institutions regulator, which took effect on January 1, 2018, gave these products an explicit capital charge: each policy must be classified as lapse-supported or lapse-sensitive, and the former are capitalized against a permanent 30% drop in best-estimate lapse rates.
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