Article

Life Insurance Lapse Behavior

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Abstract

Life insurance policy lapses are detrimental to issuing insurers when lapses substantially deviate from insurer expectations. The extant literature has proposed and tested, using macroeconomic data, several hypotheses regarding lapse determinants. While macroeconomic data are useful in providing a general test of lapse determinants, the use of aggregate data precludes an analysis of microeconomic factors that may drive the lapse decision. We develop and test a microeconomic model of voluntary life insurance lapse behavior and provide some of the first evidence regarding household factors related to life insurance lapses. Our findings support and extend the prior evidence regarding lapse determinants. Consistent with the emergency fund hypothesis we find that voluntary lapses are related to large income shocks, and consistent with the policy replacement hypothesis we find that the decision to lapse a life insurance policy is directly related to the purchase of a different life insurance policy. We also find that age is an important moderating factor in the lapse decision. Changes in income appear to more directly affect the decision to lapse for younger households, while they are generally unrelated to the lapse decision for older households.

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... Finally, the emergency fund hypothesis (EFH) posits that liquidity shocks drive lapse behavior. The hypotheses are tested adopting macroeconomic variables (Dar and Dodds,1989;Outreville, 1990b;Kuo et al., 2003;Kim, 2005;Kiesenbauer, 2012;Russell et al., 2013), policy and policyholder variables (Pinquet et al., 2011;Fang and Kung, 2012;Fier and Liebenberg, 2013;Inderst and Sirak, 2014;Gemmo and Gotz, 2016) deriving diverging conclusions regarding which hypotheses hold. ...
... As the people get older the shocks on their income, health or bequest motives stimulate them to lapse their policies and the shocks on bequest motives become the most relevant in relatively older ages (Fang and Kung, 2012). The death of a spouse and going in retirement represent two possible bequest motives shocks (Fier and Liebenberg, 2013). On the other side, the negative health shocks deter lapsations and increase the adverse selection (Hendel and Lizzeri, 2003;He, 2011). ...
... On the other side, the negative health shocks deter lapsations and increase the adverse selection (Hendel and Lizzeri, 2003;He, 2011). The relevance of income shocks for the variation of lapses fades away at older ages (Fier and Liebenberg, 2013). Possibly, the increase in lapse rate at older ages could be curbed by improving the service quality of distributional channels but reinforced by offering supplementary coverage (Eling and Kiesenbauer, 2014). ...
Article
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The article analyzes the interconnectedness and gaps between two interrelated streams of literature, evolving in different time periods, by employing bibliometric tools. The research on the factors of life insurance demand started in the late 1960s and early 1970s, while more intensive works on the drivers of lapses in life insurance appeared during the 2000s. We map the research fields using our own criteria to create clusters and visualize the flow of knowledge within and between the clusters employing citation network analysis (CNA). We contribute by providing the most comprehensive systematic review that integrates both fields, additionally encapsulating studies on the demand for policy loans. The article detects the most important drivers of life insurance policyholder behavior during his/her lifetime and opens new horizons for future research.
... Beyond death, unexpected medical expenditures, income reductions, and unemployment produce a sudden demand for liquidity, accounting for early surrenders of life insurance policies. This is known as the emergency fund hypothesis: Policyholders surrender their life insurance policies to access funds otherwise saved for insurance payments and accrued cash values in order to meet unexpected liquidity needs. 1 Such surrenders are often referred to as exogenous surrenders and are well-documented by household survey data (Liebenberg, Carson, and Dumm, 2012;Fier and Liebenberg, 2013;Gemmo and Götz, 2016;and Fang and Kung, 2020). However, the current actuarial practice has not included any spike of exogenous surrender rates for liquidity needs after a population-wide health shock into contract valuation. ...
Preprint
Population-wide health shocks, for example, pandemics, affect life insurance owners beyond their health impact. This paper considers joint impacts of their surrender behavior adaptions and mortality rise following a population-wide health shock on insurance pricing. We build a model that captures both more surrenders of contracts to meet unexpected liquidity needs and less financially beneficial surrenders to keep insurance protection after the shock. Unlike the systemic mortality rise impact that turns out to be negligible, we find that policyholders' surrender behavior adaptions substantially devalue policies with increasing emergency surrenders being the main driver. Regulatory solvency protection partly restrains the devaluation.
... A summary of the data set is presented in Table 1. These variables have been selected because they have been shown to be relevant in predicting life insurance lapse behaviour in the literature, such as Fier & Liebenberg (2013), Eling & Kiesenbauer (2014), and are commonly used predictors in this field without being overly commercially sensitive. In order to map to the spatial characteristics of the census information, we restrict our spatial information on customer location in Dublin to a small area level in order to anonymise individual policyholder data, aggregating it at a local area as opposed to a dwelling level via latitude and longitude. ...
Article
Spatial analysis ranges from simple univariate descriptive statistics to complex multivariate analyses and is typically used to investigate spatial patterns or to identify spatially linked consumer behaviours in insurance. This paper investigates if the incorporation of publicly available spatially linked demographic census data at population level is useful in modelling customers’ lapse behaviour (i.e. stopping payment of premiums) in life insurance policies, based on data provided by an insurance company in Ireland. From the insurance company’s perspective, identifying and assessing such lapsing risks in advance permit engagement to prevent such incidents, saving money by re-evaluating customer acquisition channels and improving capital reserve calculation and preparation. Incorporating spatial analysis in lapse modelling is expected to improve lapse prediction. Therefore, a hybrid approach to lapse prediction is proposed – spatial clustering using census data is used to reveal the underlying spatial structure of customers of the Irish life insurer, in conjunction with traditional statistical models for lapse prediction based on the company data. The primary contribution of this work is to consider the spatial characteristics of customers for life insurance lapse behaviour, via the integration of reliable government provided census demographics, which has not been considered previously in actuarial literature. Company decision-makers can use the insights gleaned from this analysis to identify customer subsets to target with personalized promotions to reduce lapse rates, and to reduce overall company risk.
... 24 Mantis and Farmer (1968); Lenten and Rulli (2006). 25 It is important to notice that studies dealing with life insurance lapse rates (the inverse of life insurance purchases) in the context of the emergency fund hypothesis have consistently found a positive relation between lapse rates and unemployment (Outreville, 1990;Kuo et al., 2003;Liebenberg et al., 2012, Fier andLiebenberg, 2013). 26 Anderson and Nevin (1975); Ferber and Lee (1980); Gandolfi and Miners (1996). ...
Technical Report
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The purpose of this study is to estimate the influence of microeconomic determinants for men and women on life insurance purchase decisions. Indeed, only a few papers have tried to justify rigorously the gender-based differences in life insurance ownership. Based on survey data collected by the Bank of Italy in 2012 (the Survey on Income and Households) we estimate the propensity to buy and the willingness to pay for a life insurance contract. We examine the differences between two types of contracts, i.e. traditional life and term life insurance and show that, in all cases, women are less likely to be insured than men. The demand for insurance is highly correlated with income, family structure and employment status. Geographical variables within Italy are significantly affecting the demand too. More importantly, we introduce novel variables related to the financial status of households and their proximity to the financial market, by considering home and stock portfolio ownership. These determinants turn out to be significant and to affect demand almost as much as traditional variables. To study policy implications, we calculate the probabilities of having either life or term insurance, under several scenarios for the determinants of demand. Again, financial market proximity plays a key role.
... 24 Mantis and Farmer (1968); Lenten and Rulli (2006). 25 It is important to notice that studies dealing with life insurance lapse rates (the inverse of life insurance purchases) in the context of the emergency fund hypothesis have consistently found a positive relation between lapse rates and unemployment (Outreville, 1990;Kuo et al., 2003;Liebenberg et al., 2012, Fier andLiebenberg, 2013). 26 Anderson and Nevin (1975); Ferber and Lee (1980); Gandolfi and Miners (1996). ...
Article
The purpose of this study is to analyse, for men and women, the microeconomic determinants of life insurance purchases. Indeed, only a few papers have tried to justify rigorously the gender-based differences in life insurance ownership. On the basis of survey data collected by the Bank of Italy in 2012 (the Survey on Income and Households), we estimate the propensity to buy and the willingness to pay for a life insurance contract. We examine the differences between two types of contracts, that is, traditional life and term life insurance and show that, in all cases, women are less likely to be insured than are men. The demand for insurance is highly correlated with income, family structure and employment status. Geographical variables within Italy significantly affect the demand too. We introduce novel variables that measure the financial status of households and their proximity to the financial market or, similarly, their familiarity with financial market opportunities. These determinants turn out to be significant and affect demand almost as much as traditional variables. To study policy implications, we calculate the probabilities of having either traditional life or term insurance, under several scenarios for the determinants of demand. Again, financial market proximity plays a key role. © 2016 The International Association for the Study of Insurance Economics.
... Identifying the factors that contribute to creating customer satisfaction may assist in understanding how to eliminate the problem of customer dissatisfaction that adversely affect life insurance growth (Fetchel, 2012;Fier & Liebenberg, 2013). The results of the research might contribute to knowledge in enhanced insurance business practice. ...
Thesis
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Abstract The growth rate of life insurance in Ghana is under 1% of GDP, and life insurance company leaders must identify and implement customer satisfaction strategies that will aid business growth and sustainability. Guided by the theory of customer satisfaction management systems (CSMS), the purpose of this multiple case study was to explore customer satisfaction strategies that life insurance company leaders execute to grow and sustain the life insurance business. Twelve life insurance company leaders working in the Accra-Tema geographic area participated in face-to-face semistructured interviews for this study. Data analysis involved compiling, disassembling, reassembling, interpreting, and concluding the data. Member checking and methodological triangulation augmented the creditability of participants’ responses and confirmed research findings. The research findings accentuated 29 themes that coalesced into 4 major themes: quality service delivery, public perception of insurance, education and awareness creation, and business growth and sustainability. Findings indicated feedback on life insurance policy, understanding of life insurance function and benefits, responsiveness, and operational efficiency as determinants of customer satisfaction. These findings may contribute to social change by creating awareness of the relevance of life insurance in the socioeconomic development of individuals, families, organizations, and communities, leading to financial security to reduce poverty levels in Ghana. The research may be useful to insurance practitioners who desire to improve insurance penetration for business and sustainability.
... Fier and Liebenberg [11] test a microeconomic model of voluntary life insur- ance lapse behavior, linking the lapses with household related factors. They find evidence that lapses are related to large income shocks and to the purchase of a different life insurance policy. ...
... A high lapse rate might be having a negative impact on insurer's reputation which might result in even more policyholder lapsing or choose to surrender the insurance policy, as well as harm new business (Eling & Kochanski, 2013). From the perspective of an insurer, the excessive policy with lapse status adversely give impacts to costs, mortality experience, investment returns, each of which will negatively affect the financial stability and well-being of the insurance company (Fier & Liebenberg, 2013). Besides, lapses also will diminish the effectiveness of risk pooling and lapse risk accounts for half of the capital requirements in the life insurance underwriting. ...
... A high lapse rate might be having a negative impact on insurer's reputation which might result in even more policyholder lapsing or choose to surrender the insurance policy, as well as harm new business (Eling & Kochanski, 2013). From the perspective of an insurer, the excessive policy with lapse status adversely give impacts to costs, mortality experience, investment returns, each of which will negatively affect the financial stability and well-being of the insurance company (Fier & Liebenberg, 2013). Besides, lapses also will diminish the effectiveness of risk pooling and lapse risk accounts for half of the capital requirements in the life insurance underwriting. ...
Article
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Insurer usually incurs expenses such as policy issuance cost, commission and administrative costs after the launching of an insurance product. When a policyholder decided to lapse a policy, the insurer have to seek for alternative to cover all the losses, which might liquidate high-yielding investments in order to satisfy their requests for the cash value or surrender value. Therefore, it is crucial to understand and develop a classification model to determine the surrender or lapse risk. In this study, four classification models such as logistic regression, k-Nearest Neighbor, Neural Network (NN) and Support Vector Machines (SVM) are used to model the life insurance lapse risk, which is the risk thatinvolving the termination of policies by the policyholders. Classification performance criterions such as prediction accuracy and area under the Receiver Operating Curve (ROC) are used to compare the performance between the models. The results showed that SVMwas outperformed than NN, logistic regression and k-Nearest Neighbor.
... Despite their theoretical interest, we must acknowledge that the formulas involving lapse rates must be considered with great care as it is extremely difficult to estimate or forecast such rates: cancelling the contract is at the discretion of the policyholder and this decision may depend on individual factors as well as macroeconomic conditions (including current market interest rates compared to the technical guaranteed one). See, e.g., Eling and Kiesenbauer (2013) or Fier and Liebenberg (2013) as well as the references therein. This is why many insurers do not allow for lapses in premium calculation. ...
Article
Premiums and benefits associated with traditional life insurance contracts are usually specified as fixed amounts in policy conditions. However, reserve-dependent surrender values and reserve-dependent expenses are common in insurance practice. The famous Cantelli theorem in life insurance ensures that under appropriate assumptions surrendering can be ignored in reserve calculations provided the surrender payment equals the accumulated reserve. In this paper, more complex reserve-dependent payment patterns are considered, in line with insurance practice. Explicit formulas are derived for the corresponding reserve.
... LC Fischer (1973) showed that economic lifecycle patterns related to labor income, consumption, and savings affect insurance purchases. We found that divorce enhances the surrender rate, and Fier and Liebenberg (2013) showed that unmarried singles and married couples without children demand less insurance, which is consistent with our results to some degree. Both studies show a high lapse rate for singles. ...
Article
In insurance, the surrender rate is an important variable that threatens the sustainability of insurers and determines the profitability of the contract. Unlike other actuarial assumptions that determine the cash flow of an insurance contract, however, it is characterized by endogenous variables such as people's economic, social, and subjective decisions. Therefore, a microscopic approach is required to identify and analyze the factors that determine the lapse rate. Specifically, micro-level characteristics including the individual, demographic, microeconomic, and household characteristics of policyholders are necessary for the analysis. In this study, we select panel survey data of Korean Retirement Income Study (KReIS) with many diverse dimensions to determine which variables have a decisive effect on the lapse and apply the lasso regularized regression model to analyze it empirically. As the data contain many missing values, they are imputed using the random forest method. Among the household variables, we find that the non-existence of old dependents, the existence of young dependents, and employed family members increase the surrender rate. Among the individual variables, divorce, non-urban residential areas, apartment type of housing, non-ownership of homes, and bad relationship with siblings increase the lapse rate. Finally, among the financial variables, low income, low expenditure, the existence of children that incur child care expenditure, not expecting to bequest from spouse, not holding public health insurance, and expecting to benefit from a retirement pension increase the lapse rate. Some of these findings are consistent with those in the literature. © 2021 The Korean Statistical Society, and Korean International Statistical Society. All Rights Reserved.
... The emergency fund hypothesis implies the precautionary motive. Policyholders tend to surrender their life insurance policies in case of significant liquidity shocks (Fier & Liebenberg, 2013;Gemmo & Götz, 2016;Kuo et al., 2003;Outreville, 1990). Finally, households may hold life insurance if they face significant financial obligations (Lin & Grace, 2007) or anticipate increasing liquidity constraints 3 in case of wage earner's death. ...
Article
Full-text available
The literature devoted limited attention to exploring the relationship between financial development and life insurance demand. Financial development supports life insurance supply by providing confidence in the financial system, more efficient payment systems, and higher availability of financial instruments. However, financial development reduces households' needs to save by relaxing borrowing constraints, indirectly affecting life insurance demand. We contribute by providing a demand‐driven explanation of the negative consequences of financial development on life insurance development. We find that more credit‐constrained countries have higher life insurance penetration on average. Indirectly, the role of borrowing constraints signifies the importance of life insurance policies as a financing tool in case of the realization of various background risks. This study integrates the knowledge from life insurance theory, life insurance lapse, policy loans demand, and saving under liquidity constraints literature and produces implications for researchers, policymakers, and life insurers.
... Liebenberg, Carson, and Dumm (2012) find that households are twice more likely to surrender their policy after a spouse becomes unemployed. Fier and Liebenberg (2013) find that the probability of voluntarily lapsing a policy increases after large negative income shocks, especially for those with higher debt. Using detailed socio-demographic data from Germany, Inderst and Sirak (2014) find that income and unemployment shocks are leading causes of lapses. ...
Article
Most individual life insurance policies lapse, with lapsers cross-subsidizing non-lapsers. We show that policies and lapse patterns predicted by standard rational expectations models are the opposite of those observed empirically. We propose two behavioral models consistent with the evidence: (i) consumers who forget to pay premiums and (ii) consumers who understate future liquidity needs. We conduct two surveys with a large insurer. New buyers believe that their own lapse probabilities are small compared to the insurer’s actual experience. For recent lapsers, forgetfulness accounts for 37.8 percent of lapses while unexpected liquidity accounts for 15.4 percent.
... udy included the economic and panel data collected from Beema Samiti. Data related to lapse rate, revival rate, surrender rate and profitability were collected on an annual basis.The study is limited to the period from 2010 to 2019 AD. A panel data consisting of 17 cross sections (insurance company) covering a 10-year period is used for this study.Fier and Liebenberg (2013) found that voluntary lapses are related to large income shocks, and consistent with the policy replacement hypothesis. The decision to lapse of life insurance policy is directly related to the purchase of a different life insurance policy. Their study also found that age is an important moderating factor in the lapse decision. Changes i ...
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Growth and competition are rapidly rising in life insurance sector. Companies have challenge to stay in the market and earn profit as well as build trust among the end users. In this context, companies have to expand business by selling more life insurance policies. However, only selling new policies might not be the solution to increase profit. Thus, company needs to ensure minimum to zero lapse rates for the sustainable growth of the company. This study investigated the impact of lapse rate and revival rate on net worth, profitability, life fund, and total premium income of life insurance industries in Nepal over the period 2010-2019. The study employed Generalized Method of Moments (GMM) for empirical estimation. The empirical results showed the lapse rate, profitability, revival rate and surrender rate of 23.91%, 2.64%, 88.82% and 3.83%, respectively in the life insurance industries in Nepal during the 10 years’ period. The lapse rate was significantly negatively correlated with life fund and the total premium income with the–model coefficients of 0.1474065 and -0.19244, respectively. Moreover, the empirical estimation showed a significant positive correlation between lapse rate and profitability. This might be because high lapse rate lowers the provision of unexpired risk and life fund resulting in higher amount of profitability. The revival rate was significantly positively correlated with the profitability. This might be because higher revival rate increases the renewal income of a company, resulting in more funds available for investment thereby bringing positive cash inflow for the company. However, the revival rate did not show any significant association with net worth, life fund and total premium income.
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Many policyholders surrender their life insurance policies early, leading to substantial monetary losses for private households. Surrender can be explained rationally if it constitutes the last resort providing liquidity in the event of an urgent need of cash. Yet we find clear evidence in German panel data that for more than half of all surrendered contracts investors had cheaper options available to provide the required liquidity. This finding demonstrates that there must be other factors influencing this important life decision. We provide a behavioral explanation, focusing on the role of individual decision heuristics, financial literacy, and financial advice. In particular, we show that financial literacy and financial advice can mitigate the behavioral temptation to lapse, while the tendency to rely on heuristics increases lapse probability.
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We present and empirically implement a dynamic discrete choice model of life insurance decisions to assess the importance of various factors in explaining life insurance lapsation. We estimate a model using information on life insurance holdings from the Health and Retirement Study. Counterfactual simulations using the estimates of our model suggest that a large fraction of life insurance lapsations are driven by idiosyncratic shocks, uncorrelated with health, income, and bequest motives, particularly when policyholders are relatively young. As the remaining policyholders get older, however, the role of such independent and identically distributed (i.i.d.) shocks gets smaller, and more of their lapsation is driven by income, health, or bequest motive shocks. As anticipated, income and health shocks are relatively more important than bequest motive shocks in explaining lapsation when policyholders are young, with bequest motive shocks playing a more important role as we age.
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This study compares the demand for life insurance in Mexico with that in the United States. It provides a brief historical perspective on the growth of life insurance purchases in the two countries and employs regression analysis to estimate life insurance demand functions. The principal findings are that age, education, and level of income affect the demand for life insurance and that the income elasticity of demand for life insurance is much higher in Mexico than in the United States.
Article
A typical life insurance contract provides a package of options or rights to the policyowner that is not precisely duplicated by any other combination of commonly available contracts. Viewed from this perspective, life insurance enjoys a unique position in the field of investments and should be judged in this light. The paper shows that an options viewpoint provides a more complete explanation of policyowner behavior towards life insurance than the conventional savings-and-protection view. Also, the paper examines the effect of the options viewpoint in restating the amount of insurance protection and discusses implications of the options view for product development and cost disclosure.
Article
In this article, a model of life insurance holding is formulated. It takes into account the liquidation values and liquidity of estate assets and the ability of life insurance death benefits to bypass the probate process. Tobit regressions based on the model are run using the U.S. Survey of Consumer Finances 1989 data set. The results showed net worth (fixing net liquid assets and annuity wealth) and annuity wealth (fixing net liquid assets and net worth) to be positively related to life insurance holding. Moreover, net liquid asset holding (fixing net worth and annuity wealth) and charitable motives also affect life insurance holding.
Article
The option's package view of the whole life insurance policy suggests that a whole life policy is a package of options, each of which has value and is expected to influence the price of the policy. This viewpoint implies the general hypothesis that price differences between whole life policies can be explained by differences in policy contract provisions and differences in selected company characteristics. The option's package theory was empirically investigated using regression analysis on data from a sample of policies marketed in North Carolina. The results suggest support for the options package theory.
Article
In this paper, one error-correction model (ECM) that is able to avoid the problem of producing noise within traditional multiple cointegration vectors has been employed to explore the dynamics of surrender behavior. The evidence shows that both the emergency fund hypothesis and interest rate hypothesis are sustained in the short run as well as in the long run. A unique cointegration relationship within the surrender dynamics has been validated. In addition, a new hypothesis test that stresses the competition for the withdrawal of life insurance policy cash values has also been conducted. Such a crowding-out effect between policy loans and policy surrenders might be attributed to the motivation that keeps a life policy in force, the existence of surrender charges, and the automatic premium loan provision.
Article
This article assesses the impact that redesigned life insurance policy loan provisions and changes in financial markets have had on the demand for policy loans. The study investigates policy loan demand for the years 1970 through 1989, which encompasses periods of fixed and variable loan rates. The results suggest that policy loan demand has changed since the introduction of variable loan rates and the redesign of policies. Specifically, the findings show that demand for policy loans driven by arbitrage potential has been reduced.
Article
This paper studies the determinants of lapse in the German life insurance industry. Logistic re-gression models are employed using data on macroeconomic indicators and company character-istics of 133 German life insurers from 1997 to 2009. Five different product categories are con-sidered (endowment, annuity, term life, group, and other). The findings indicate that the main lapse determinants are very similar across all product categories, except that the direction of impact is reversed for the product category ''other,'' which consists almost exclusively of unit-linked business. In particular, the interest rate and emergency fund hypotheses are supported only for unit-linked business, while these hypotheses do not hold for the remaining product categories. Overall, the analysis provides an understanding of lapse dynamics related to economic indicators and company characteristics. The derived models can be used to predict lapse rates for the dif-ferent product categories considered. The results are important for insurance company managers, regulators, and life insurance customers.
Article
Prior research suggests that neither the choice to own life insurance nor the amount purchased is consistently related to the presence of children in the household. While these perplexing findings are based on a static framework, we alternatively examine life insurance demand in a dynamic framework as a function of changes in household life cycle and financial condition. Our results indicate both a statistically and economically significant relation between life events, such as new parenthood, and the demand for life insurance. We also provide new evidence in support of the emergency fund hypothesis: households in which either spouse has become unemployed are more likely than other households to surrender their whole life insurance.
Article
Previous research has examined the demand for life insurance policy loans using aggregate policy loan data. In contrast, we use a detailed household survey data set containing life insurance and policy loan information to alternatively, and in some cases more directly, examine the four hypotheses traditionally associated with policy loan demand. Our research provides the first U.S. evidence (in the post-World War II period) in support of the policy loan emergency fund hypothesis. In particular, we find that the more detailed emergency fund proxies used here reveal a significantly positive relation between loan demand and recent expense or income shocks. Copyright (c) The Journal of Risk and Insurance, 2010.
Article
There has been a long-term interest in the subject of lapse rates and the basic question of what causes lapses has been under study for many decades by the insurance industry. The interest rate hypothesis has received the most attention and empirical support in recent years. An older hypothesis is that cash values are utilized by policyholders as an emergency fund. This hypothesis deserves attention here because it has not been extensively tested.
Article
Life insurers often claim that the life settlement industry reduces their surrender profits and leads to an adverse shift in their portfolio of insured risks; that is, high risks remain in the portfolio instead of surrendering. In this article, we aim to quantify the effect of altered surrender behavior--subject to the health status of an insured--in a portfolio of life insurance contracts on the surrender profits of primary insurers. Our model includes mortality heterogeneity by applying a stochastic frailty factor to a mortality table. We additionally analyze the impact of the premium payment method by comparing results for annual and single premium payments. Copyright (c) The Journal of Risk and Insurance, 2009.
Article
The non-forfeiture options of a cash value life insurance policy allow the policyholder to gain access to any cash value he or she may have built up over the life of the contract. One of these options is the policy surrender, which is a voluntary decision to terminate coverage and to receive the entire cash value of the policy. Since most life insurer assets are invested in fixed-income instruments of positive duration, insurer portfolios are susceptible to losses in the event of an increase in interest rates. As a withdrawal feature, the surrender option is a potential source of interest rate risk for life insurers. The surrender option may also be exercised by many policyholders in the event of economic duress. Because the surrender option is a legally mandated part of all cash value life insurance policies, insurers may be legally bound to bear a risk that may be highly correlated across their pools of cash value life insurance policies, violating a primary principle of insurance. This dissertation analyzes data on life insurance policyholder surrender activity to determine whether the risks posed by policy surrender are functions of certain macroeconomic variables and, as a result, are highly correlated across all policies. The results indicate that surrender activity is positively related to inflation, real interest rates, and unemployment, while surrender activity is directly related to real per capita income. Average policy size also has an inverse relationship with surrender activity while policy loans and company leverage have a positive but lagged influence on surrenders. Since many policies that are surrendered are replaced with new, and sometimes better, products, the incentives of the insurance agent in recommending surrender and replacement are potentially important factors in life insurance disintermediation. Specifically, the role of agent compensation is explored in a principal-agent context and legalized premium rebating is analyzed using data from the two states in which rebating has been legalized, California and Florida. Rebating is found to have a direct statistical relationship with surrender activity.
Article
Introduction to life and health insurance -- Types, uses and evaluation of life and health insurance -- The management, operation, and regulation of life insurance companies
Article
Sumario: The purpose of this dissertation is to determine the factors leading to variations in life insurance consumption across nations. These factors are identified as being economic, demographic, sociocultural, and governmental in nature. Then, the effect of each factor on life insurance consumption is examined with a unique international data set compiled for the purposes of this study. Both premium expenditures and life insurance in force measure life insurance consumption in this study. Tesis Univ. of Georgia, 1992
Article
In corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms or across time, and OLS standard errors can be biased. Historically, researchers in the two literatures have used different solutions to this problem. This paper examines the different methods used in the literature and explains when the different methods yield the same (and correct) standard errors and when they diverge. The intent is to provide intuition as to why the different approaches sometimes give different answers and give researchers guidance for their use. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
Article
This article examines the determinants of life insurance consumption in OECD countries. Consistent with previous results, we find a significant positive income elasticity of life insurance demand. Demand also increases with the number of dependents and level of education, and decreases with life expectancy and social security expenditure. The country's level of financial development and its insurance market's degree of competition appear to stimulate life insurance sales, whereas high inflation and real interest rates tend to decrease consumption. Overall, life insurance demand is better explained when the product market and socioeconomic factors are jointly considered. In addition, the use of GMM estimates helps reconcile our findings with previous puzzling results based on inconsistent OLS estimates given heteroscedasticity problems in the data. Copyright The Journal of Risk and Insurance, 2007.
Article
Using the Survey of Consumer Finances, we examine the life cycle demand for different types of life insurance. Specifically, we test for the consumer's aversion to income volatility resulting from the death of a household's wage-earner through the purchase of life insurance. We first develop a financial vulnerability index to control for the risk to the household. We then examine the life cycle demand for life insurance using several definitions of life insurance. We find, in contrast to previous research, that there is a relationship between financial vulnerability and the amount of term life or total life insurance purchased. In addition, we find older consumers use less life insurance to protect a certain level of financial vulnerability than younger consumers. Secondly, our study provides evidence that life insurance demand is jointly determined as part of a household's portfolio. Finally, we consider the impact of family members' nonmonetary contribution on the household's life cycle protection decision. Our results provide some evidence that households take into account the value of nonmonetary contribution in their insurance purchase. Copyright The Journal of Risk and Insurance, 2007.
Article
We use the cointegration technique to reexamine the contending lapse rate hypotheses: the emergency fund hypothesis and the interest rate hypothesis. We find that the unemployment rate affects the lapse rate in both the long and short run, whereas the interest rate causes variations in the lapse rate mainly in the long run. This evidence seems to be in favor of the emergency fund hypothesis. However, according to the impulse response analysis of the estimated error-correction model, the interest rate overwhelms the unemployment rate on the overall impact on the dynamics of lapse rate. In other words, the interest rate hypothesis is favored against the emergency fund hypothesis in the sense that the interest rate is more economically significant than the unemployment rate in explaining the lapse rate dynamics. Copyright The Journal of Risk and Insurance.
Suitability and Life Insurance Policy Replacement
  • James M Carson
  • Mark D Forster
Carson, James M. and Mark D. Forster, 2000, "Suitability and Life Insurance Policy Replacement," Journal of Insurance Regulation, 18(4): 427-447.
Insurance Company-Level Determinants of Life Insurance Policy Performance
  • James M Carson
  • Randy E Dumm
Carson, James M. and Randy E. Dumm, 1999, "Insurance Company-Level Determinants of Life Insurance Policy Performance," Journal of Insurance Regulation, 18: 195-206.
An Empirical Analysis of Life Insurance Policyholder Surrender Activity. Dissertation. University of Pennsylvania An Approximate Distribution of Estimates of Variance Components
  • D T Russell
Russell, D. T. 1997. An Empirical Analysis of Life Insurance Policyholder Surrender Activity. Dissertation. University of Pennsylvania, Philadelphia, PA. Satterthwaite, F. E. 1946. An Approximate Distribution of Estimates of Variance Components. Biometrics Bulletin 2: 110–114.
Panics and Cash Values
  • N A Linton
Linton, N. A. 1932. Panics and Cash Values. Transactions of the Actuarial Society of America 38: 365–394.
  • Kenneth Black
  • Harold J Jr
  • Skipper
Black, Kenneth Jr. and Harold J. Skipper, 2000, Life and Health Insurance (13 th Edition), New Jersey: Prentice-Hall, Inc.
2011 LIMRA Buyer / Nonbuyer Study
  • Limra
LIMRA, 2011, "2011 LIMRA Buyer / Nonbuyer Study," Accessed on December 12, 2011 from http://www.soa.org/files/pdf/2011-chicago-annual-mtg-145.pdf.
  • Petersen M. A.