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The Impacts of Surrender Options on Reserve Durations

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  • Chenghsien Tsai

Abstract

Estimating the interest rate risk of life insurance reserves is essential for insurers, and surrender options are critical to the estimation. This article advances our understanding of how surrender options affect the durations of reserves. We identify a pattern of the reserve duration with respect to the interest rate that is important in explaining how surrender rate levels and the interest‐rate sensitivity of surrenders affect reserve durations. We further found that the surrender behavior that is more positively related to the interest rate produces larger/smaller effective dollar durations when the interest rate is low/high.

Suggested Citation

  • Chenghsien Tsai, 2012. "The Impacts of Surrender Options on Reserve Durations," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 15(2), pages 165-184, September.
    • Handle: RePEc:bla:rmgtin:v:15:y:2012:i:2:p:165-184
    DOI: j.1540-6296.2012.01216.x
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    File URL: https://doi.org/10.1111/j.1540-6296.2012.01216.x
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    References listed on IDEAS

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    1. Weiyu Kuo & Chenghsien Tsai & Wei‐Kuang Chen, 2003. "An Empirical Study on the Lapse Rate: The Cointegration Approach," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(3), pages 489-508, September.
    2. Changki Kim, 2005. "Modeling Surrender and Lapse Rates With Economic Variables," North American Actuarial Journal, Taylor & Francis Journals, vol. 9(4), pages 56-70.
    3. Kim Changki, 2005. "Surrender Rate Impacts on Asset Liability Management," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 1(1), pages 1-36, June.
    4. Tsai, Chenghsien & Kuo, Weiyu & Chen, Wei-Kuang, 2002. "Early surrender and the distribution of policy reserves," Insurance: Mathematics and Economics, Elsevier, vol. 31(3), pages 429-445, December.
    5. Chenghsien Tsai, 2009. "The Term Structure of Reserve Durations and the Duration of Aggregate Reserves," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(2), pages 419-441, June.
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    Cited by:

    1. Anne MacKay & Maciej Augustyniak & Carole Bernard & Mary R. Hardy, 2017. "Risk Management of Policyholder Behavior in Equity-Linked Life Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(2), pages 661-690, June.

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