Lapse and Replacement : An Evidence of Intermediary’s Influence in Life Insurance

The purpose of the study is to empirically examine ‘the agent incentive hypothesis’, the intermediary’s involvement in the replacement of life insurance policy. Based on about 3.6 million life insurance replacement data in Korea, the paper finds the drastic lapse increases after the 12th month of policy duration when the insurance agent’s commission begins to decrease substantially. Employing a regression discontinuity model, the paper identifies a significant difference between before and after the 12th month policy duration. This paper also finds while life insurance replacement from different companies is stable over the investigation period, replacement from the same companies peaks right after the 12th month. These results support the agent incentive hypothesis and strongly suggest that regulators and insurers have to control agent’s incentive in life insurance lapse and replacement process.