Surrender Contagion in Life Insurance

33 Pages Posted: 19 Dec 2019 Last revised: 31 Mar 2020

See all articles by Chunli Cheng

Chunli Cheng

University of Bonn - Department of Economics

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: December 3, 2019

Abstract

This paper incorporates contagious surrender behavior into the valuation and risk management of participating life insurance contracts, allowing for structural default of the insurance company. The insurance pool features a financially sophisticated (professional) policyholder and many retail (non-professional) policyholders. A surrender-history-dependent intensity process is introduced to capture the non-professionals’ contagious surrender behavior. While contagion aligns the non-professionals’ surrender behavior with the optimal surrender of the professional, it jeopardizes the non-professionals’ financial position in favor of equity holders as a strict regulatory intervention or a risky investment strategy is imposed.

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 (December 3, 2019). Available at SSRN: https://ssrn.com/abstract=3497366 or http://dx.doi.org/10.2139/ssrn.3497366

Chunli Cheng

University of Bonn - Department of Economics ( email )

Bonn
Germany

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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