The Effect of Secondary Markets on Equity-Linked Life Insurance with Surrender Guarantees

37 Pages Posted: 12 Oct 2011 Last revised: 18 Jan 2012

See all articles by Christian Hilpert

Christian Hilpert

Sun Yat-Sen University (SYSU) - Lingnan (University) College

Jing Li

Institute for Finanancial Economics and Statistics

Alexander Szimayer

University of Hamburg - Faculty of Economics and Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: January 18, 2012

Abstract

Many equity-linked life insurance products offer the possibility to surrender policies prematurely. Secondary markets for policies with surrender guarantees influence both policyholders and insurers. We show that insurers increase premiums to adjust for higher surrender rates of customers and optimized surrender behavior by investors acquiring the policies on secondary markets. Secondary markets lead to a gap in policy value between insurer and policyholder. In our model, policyholders can profit from sufficiently competitive secondary markets, but for non-competitive markets, the value gap lowers the customer's policy value substantially. Benefits drawn from secondary markets by customers increase in their willingness to access these markets.

Keywords: equity-linked life insurance contracts, surrender guarantee, bounded rationality ,fair contract analysis, secondary market

JEL Classification: G13, G22, C65

Suggested Citation

Hilpert, Christian and Li, Jing and Szimayer, Alexander, The Effect of Secondary Markets on Equity-Linked Life Insurance with Surrender Guarantees (January 18, 2012). Available at SSRN: https://ssrn.com/abstract=1942189 or http://dx.doi.org/10.2139/ssrn.1942189

Christian Hilpert (Contact Author)

Sun Yat-Sen University (SYSU) - Lingnan (University) College ( email )

Guangzhou
China

Jing Li

Institute for Finanancial Economics and Statistics ( email )

Adenauerallee 24-42
Bonn, D-53113
Germany
0049-228-736104 (Phone)

Alexander Szimayer

University of Hamburg - Faculty of Economics and Business Administration ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

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