Surrender Contagion in Life Insurance

44 Pages Posted: 19 Dec 2019 Last revised: 28 Jul 2021

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

Mass surrenders—spiking surrenders of life insurance policies within a short period— are widely documented prior to many life insurers failures, but their impacts on insurers are rarely quantified. This paper builds a model of mass surrenders in a heterogeneous pool consisting of a minority of financially guided policyholders and a majority of individual policyholders with contagious behavior that can be triggered contingent on past surrenders becoming salient. By incorporating it into a life insurance pricing framework, we study mass surrenders’ impacts on contract valuation and early bankruptcy of the insurer, allowing for its structural default under regulatory solvency intervention. Our numerical results show that while contagion aligns individual policyholders’ surrender behavior with the optimal surrender of financially guided ones, it jeopardizes their financial positions in favor of equity holders. Surprisingly, contagion at worst only marginally enlarges the insurer’s bankruptcy rate, which is not driven by strict solvency regulation. Insurers have incentives to encourage contagion. Despite its public perception of endangering market stability as similar to a bank run, surrender contagion does not threaten insurers’ solvency, but can improve it instead with the assets left behind by individual policyholders.

Keywords: Contagious Surrender Risk, Bounded Rationality, Insurance Regulation, Default Risk, Hawkes Process

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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