Surrender Contagion in Life Insurance

38 Pages Posted: 19 Dec 2019 Last revised: 20 Oct 2020

See all articles by Chunli Cheng

Chunli Cheng

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

Christian Hilpert

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

Aidin Miri Lavasani

University of Hamburg - School of Business, Economics and Social Sciences

Mick Schaefer

University of Hamburg - School of Business, Economics and Social Sciences

Date Written: October 20, 2020

Abstract

This paper incorporates contagious surrender behavior, a critical risk on life insurance markets, into the valuation and risk management of life insurance policies, allowing for structural default of the insurance company. Our heterogeneous policyholder pool contains a minority of financially guided policyholders and a majority of individual policyholders. In a calibrated model, we demonstrate that contagion cannot provide an informative benefiting signal to individual policyholders who follow the optimal surrender of financially guided policyholders once their surrenders trigger public attention. Contagion robustly benefits the insurance company at the expense of individual policyholders but leaves the default probability largely unchanged.

Keywords: Contagion, Bounded Rationality, Insurance Regulation, Early Default

Suggested Citation

Cheng, Chunli and Hilpert, Christian and Miri Lavasani, Aidin and Schaefer, Mick, Surrender Contagion in Life Insurance (October 20, 2020). Available at SSRN: https://ssrn.com/abstract=3497366 or http://dx.doi.org/10.2139/ssrn.3497366

Chunli Cheng

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

135 Xingang Xi Road
Haizhu District
Guangzhou, Guangzhou 510275
China

Christian Hilpert (Contact Author)

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

Guangzhou
China

Aidin Miri Lavasani

University of Hamburg - School of Business, Economics and Social Sciences ( email )

Von-Melle-Park 5
Room 3045
Hamburg, 20146
Germany

Mick Schaefer

University of Hamburg - School of Business, Economics and Social Sciences ( email )

Von-Melle-Park 5
Hamburg, DE Hamburg D-20146
Germany

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