Life Insurance Convexity

81 Pages Posted: 14 Oct 2020 Last revised: 3 Jul 2023

See all articles by Christian Kubitza

Christian Kubitza

European Central Bank, Financial Research Division

Nicolaus Grochola

Goethe University Frankfurt

Helmut Gründl

Goethe University Frankfurt - Department of Finance; International Center for Insurance Regulation

Date Written: June 21, 2023

Abstract

Life insurers sell savings contracts with surrender options, which allow policyholders to prematurely receive guaranteed surrender values. These surrender options move toward the money when interest rates rise. Hence, higher interest rates raise surrender rates, as we document empirically by exploiting plausibly exogenous variation in monetary policy. Using a calibrated model, we then estimate that surrender options would force insurers to sell up to 2\% of their investments during an enduring interest rate rise of 25 bps per year. We show that these fire sales are fueled by surrender value guarantees and insurers' long-term investments.

Keywords: Life Insurance, Liquidity Risk, Interest Rates, Surrender Options, Systemic Risk

JEL Classification: G22, E44, E52, G52

Suggested Citation

Kubitza, Christian and Grochola, Nicolaus and Gründl, Helmut, Life Insurance Convexity (June 21, 2023). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3710463 or http://dx.doi.org/10.2139/ssrn.3710463

Christian Kubitza (Contact Author)

European Central Bank, Financial Research Division ( email )

Nicolaus Grochola

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt, 60323
Germany

Helmut Gründl

Goethe University Frankfurt - Department of Finance ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://https://www.wiwi.uni-frankfurt.de/en/departments/finance/home.html

International Center for Insurance Regulation ( email )

House of Finance
Campus Westend, Goethe University
Frankfurt am Main, D-60323
Germany

HOME PAGE: http://www.icir.de

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