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Reserve-Dependent Surrender

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  • Kamille Sofie T{aa}gholt Gad
  • Jeppe Juhl
  • Mogens Steffensen

Abstract

We study the modelling and valuation of surrender and other behavioural options in life insurance and pension. We place ourselves in between the two extremes of completely arbitrary intervention and optimal intervention by the policyholder. We present a method that is based on differential equations and that can be used to approximate contract values when policyholders exhibit optimal behaviour. This presentation includes a specification of sufficient conditions for both consistency of the model and convergence of the contract values. When not going to the limit in the approximation we obtain a technique for balancing off arbitrary and optimal behaviour in a simple, intuitive way. This leads to our suggestions for intervention models where one single parameter reflects the extent of rationality among policyholders. In a series of numerical examples we illustrate the impact of the rationality parameter on the contract values.

Suggested Citation

  • Kamille Sofie T{aa}gholt Gad & Jeppe Juhl & Mogens Steffensen, 2014. "Reserve-Dependent Surrender," Papers 1412.1991, arXiv.org.
    • Handle: RePEc:arx:papers:1412.1991
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    References listed on IDEAS

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    1. Martin Eling & Dieter Kiesenbauer, 2014. "What Policy Features Determine Life Insurance Lapse? An Analysis of the German Market," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(2), pages 241-269, June.
    2. Anna Rita Bacinello, 2003. "Fair Valuation of a Guaranteed Life Insurance Participating Contract Embedding a Surrender Option," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(3), pages 461-487, September.
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