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.
Proper pricing and risk assessment of implicit options in life insurance contracts has gained substantial attention in recent years, which is reflected in a growing literature in this field. The purpose of this article is to outline the significance of implicit options in life insurance. Toward this aim, we first compare the most popular contract types in the United States and Europe. Next, we provide a comprehensive overview and detailed description of implicit options contained in these contracts. To illustrate the impact of these options, we present contract design, valuation methods, and main results of several recent articles in this field. Our analysis indicates that a broad application of fair valuation of life insurance liabilities may lead to a trend away from traditional contract design and toward new products that are of a more transparent modular form. These new contracts will contain fewer basic guarantees and a set of additional, adequately priced options.
In this paper, we investigate the impact of different asset management and surplus distribution strategies in life insurance on risk-neutral pricing and shortfall risk. In general, these feedback mechanisms affect the contract's payoff and hence directly influence pricing and risk measurement. To isolate the effect of such strategies on shortfall risk, we calibrate contract parameters so that the compared contracts have the same market value and same default-value-to-liability ratio. This way, the fair valuation method is extended since, in addition to the contract's market value, the default put option value is fixed. We then compare shortfall probability and expected shortfall and show the substantial impact of different management mechanisms acting on the asset and liability side.
Participating life insurance contracts are one of the most important products in the European
life insurance market. These kind of contracts are characterized by a cliquet-style minimum interest
rate guarantee and bonus participation rules with regard to the insurer's return. Even though these
contract forms are very common, only very little research has been conducted in respect to their per-
formance. Hence, we conduct a performance analysis to provide a decision support for policyholders.
We decompose a participating life insurance contract in a term life insurance and a savings part and
simulate the cash flow distribution of the latter. We compare the simulation result with cash flows
resulting from a benchmark investing into the same portfolio but without investment guarantee and
bonus distribution scheme in order to measure the impact of these two product features. To provide
a realistic picture within the two alternatives, we take transaction costs and distribution effects be-
tween policyholders into account. We show how the payoff distribution depends heavily on the initial
reserve situation and management's discretion. Thus, the expected performance is in general difficult
to assess for policyholders.
