The value of a life insurance contract may differ depending on whether it is looked
at from the customer's point of view or that of the insurance company. We assume
that the insurer is able to replicate the life insurance contract's cash flows via assets
traded on the capital market and can hence apply risk-neutral valuation techniques.
The policyholder, on the other hand, will take risk preferences and diversification
opportunities into account when placing a value on that same contract. Customer
value is represented by policyholder willingness to pay and depends on the contract
parameters, i.e., the guaranteed interest rate and the annual and terminal surplus
participation rate. The aim of this paper is to analyze and compare these two perspectives.
In particular, we identify contract parameter combinations that--while
keeping the contract value fixed for the insurer--maximize customer value. Our
results suggest that it would be very worthwhile for insurance companies to engage
in customer segmentation based on the different ways customers evaluate life insurance contracts and embedded investment guarantees as doing so could result in
substantial increases in policyholder willingness to pay.
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, i.e., bad risks remain in the portfolio instead of surrendering. In this paper, 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. In the course of our investigation, we additionally analyze the impact of the premium payment method by comparing results for annual and single premium payments.
Universal life policies are the most popular insurance contract design in the
United States. They have either a level death benefit paying a fixed face
amount, or an increasing death benefit, which additionally pays the available
cash value, and both types include the option to switch from one to the other.
In this paper, we are interested in the fact that--unlike a switch from level to
increasing--a switch from increasing to level death benefit requires neither
fees nor additional evidence of insurability. To assess the impact of the death
benefit switch option, we develop a model framework of increasing universal
life policies embedding the option. Consideration of mortality heterogeneity
via a stochastic frailty factor allows an investigation of adverse exercise
behavior. In a comprehensive simulation analysis, we quantify the net
present value of the option from the insurer's perspective using risk-neutral
valuation under stochastic interest rates assuming empirical exercise probabilities.
Based on our results, we provide policy recommendations for life insurers.
Universal life policies are the most popular insurance contract design in the United States. They have either a level death benefit paying a fixed face amount, or an increasing death benefit, which additionally pays the available cash value, and both types include the option to switch from one to the other. In this paper, we are interested in the fact that--unlike a switch from level to increasing--a switch from increasing to level death benefit requires neither fees nor additional evidence of insurability. To assess the impact of the death benefit switch option, we develop a model framework of increasing universal life policies embedding the option. Consideration of mortality heterogeneity via a stochastic frailty factor allows an investigation of adverse exercise behavior. In a comprehensive simulation analysis, we quantify the net present value of the option from the insurer's perspective using risk-neutral valuation under stochastic interest rates assuming empirical exercise probabilities. Based on our results, we provide policy recommendations for life insurers.
In this article, we identify key characteristics and implications of the secondary market for life insurance. We examine the oldest secondary market, which is the market in the United Kingdom, the relatively young market in Germany, and the controversial U.S. market. We summarize the available data to describe the current market situation and market potential, which strongly depend on developments in the primary markets and capital markets, as well as on regulatory and legal aspects. Next, we discuss benefits and risks associated with a secondary market, which depend on each market's unique features. The three markets considered in this article are fundamentally different, and the comparative assessment is intended to offer insight into their functioning and key factors.
In this paper, we identify key characteristics and implications of the secondary
market for life insurance. We examine the oldest secondary market,
which is the market in the United Kingdom, the relatively young market in
Germany, and the controversial U.S. market. We summarize available data
to describe the current market situation and market potential, which strongly
depend on developments in the primary markets and capital markets, as well
as on regulatory and legal aspects. Next, we discuss benefits and risks associated
with a secondary market, which depend on each market's unique features.
The three markets considered in this paper are fundamentally different,
and the comparative assessment is intended to offer insight into their functioning
and key factors.
