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The Effect of Risk Aversion and Loss Aversion on Equity-Linked Life Insurance With Surrender Guarantees

26 Pages Posted: 19 Apr 2016  

Christian Hilpert

Zhongshan University - Lingnan College, Sun Yat-Sen University, China

Date Written: April 16, 2016

Abstract

This paper values equity-linked life insurance contracts with surrender guarantees for risk averse and loss averse policyholders in continuous time. With increasing risk aversion, policyholders surrender their insurances for higher values of the underlying equity fund, compared to an optimally stopped insurance contract, leading to substantial losses. Moreover, high discounting amplifies suboptimal surrender behavior. Loss averse policyholders display a different surrender behavior: Such policyholders surrender only policies for which the surrender benefit represents a large gain, while holding on to less successful contracts, so that the disposition effect increases the contract value relative to a contract stopped by a risk averse policyholder.

Keywords: Equity-linked life insurance, behavioral insurance, surrender, loss aversion

JEL Classification: G11, G22

Suggested Citation

Hilpert, Christian, The Effect of Risk Aversion and Loss Aversion on Equity-Linked Life Insurance With Surrender Guarantees (April 16, 2016). Available at SSRN: https://ssrn.com/abstract=2765806 or http://dx.doi.org/10.2139/ssrn.2765806

Christian Hilpert (Contact Author)

Zhongshan University - Lingnan College, Sun Yat-Sen University, China ( email )

Guangzhou
China

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