Mass lapse risk
The risk that a large share of life policyholders surrender at the same time, driven by rising rates or a loss of confidence, forcing the insurer to sell assets at the worst moment.
Mass lapse risk refers to the simultaneous exit of a large number of policyholders, who exercise their surrender right not according to their own needs but in reaction to the same event. Two triggers dominate: a rapid rise in rates that makes alternatives more attractive than a euro fund backed by old bonds, and a loss of confidence in the insurer's soundness. The mechanism feeds on itself, since selling bonds at a loss erodes the insurer's margin, which can fuel further distrust. The Solvency II standard formula measures it with an instantaneous shock of 40% of retail policies surrendered, and 70% for certain group policies not tied to a pension scheme. Insurers manage it through the liquidity of their assets, surrender penalties where the law allows them, and profit sharing that keeps policyholders in.
In late January 2023, Italian life insurer Eurovita was placed under special administration on the proposal of the regulator IVASS, after the 2022 rate rise had eroded its solvency; surrenders on its policies were then suspended to prevent a run on the insurer.
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