Lapse rates can reveal a wealth of information about a book; including, how it may have been approached by previous advisors. If a dishonest advisor was making unnecessary new sales to policyholders to make large commissions, these new policies could be likely to lapse within a year or two after sale.
When a book has been churned like this, it can be quite deceiving during a valuation. Although revenue is high, the lapse rates lead to very little long-term value.
Typically, if lapse rates are high, cash-flow is on a downward slope. In our experience, advisors are ruthelessly honest and hard-working people; however, lapse rates are still important to factor into the valuation.
