IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/30187.html

Aggregate Lapsation Risk

Author

Listed:
  • Ralph S. J. Koijen
  • Hae Kang Lee
  • Stijn Van Nieuwerburgh

Abstract

We study aggregate lapsation risk in the life insurance sector. We construct two lapsation risk factors that explain a large fraction of the common variation in lapse rates of the 30 largest life insurance companies. The first is a cyclical factor that is positively correlated with credit spreads and unemployment, while the second factor is a trend factor that correlates with the level of interest rates. Using a novel policy-level database from a large life insurer, we examine the heterogeneity in risk factor exposures based on policy and policyholder characteristics. Young policyholders with higher health risk in low-income areas are more likely to lapse their policies during economic downturns. We explore the implications for hedging and valuation of life insurance contracts. Ignoring aggregate lapsation risk results in mispricing of life insurance policies. The calibrated model points to overpricing on average. In the cross-section, young, low-income, and high-health risk households face higher effective mark-ups than the old, high-income, and healthy.

Suggested Citation

  • Ralph S. J. Koijen & Hae Kang Lee & Stijn Van Nieuwerburgh, 2022. "Aggregate Lapsation Risk," NBER Working Papers 30187, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30187
    Note: AP EFG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w30187.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bingzheng Chen & Zongxia Liang & Shunzhi Pang, 2024. "Dynamic Investment-Driven Insurance Pricing and Optimal Regulation," Papers 2410.18432, arXiv.org, revised Apr 2025.
    2. Kubitza, Christian & Grochola, Nicolaus & Gründl, Helmut, 2025. "Life insurance convexity," Journal of Banking & Finance, Elsevier, vol. 178(C).
    3. Baoilan, Aizelle S. & Barret, Dorothy Zoe D. & Bohol, Laica Jane N.. & Bulala, Francine May C.. & Calderon, Gracel Maye D. & Conoman, Clariz Nina P. & Fuentes, Jimkyl Klovis R. & Mazo, Hillary Grace B, 2025. "Evaluating Policy Lapse Behavior on Life Insurance Policyholders in Digos City," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 9(4), pages 4092-4111, April.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G52 - Financial Economics - - Household Finance - - - Insurance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:30187. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.