Life Insurance Convexity

Christian Kubitza, Nicolaus Grochola () and Helmut Gründl ()
Additional contact information
Nicolaus Grochola: Goethe University Frankfurt, International Center for Insurance Regulation, Germany.
Helmut Gründl: Goethe University Frankfurt, International Center for Insurance Regulation, Germany.

No 154, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: Life insurers sell savings contracts with surrender options, which allow policyholders to prema-turely receive guaranteed surrender values. These surrender options move toward the money when interest rates rise. Hence, higher interest rates raise surrender rates, as we document empirically by exploiting plausibly exogenous variation in monetary policy. Using a calibrated model, we then estimate that surrender options would force insurers to sell up to 2% of their investments during an enduring interest rate rise of 25 bps per year. We show that these fire sales are fueled by surrender value guarantees and insurers’ long-term investments.

Keywords: Life Insurance; Liquidity Risk; Interest Rates; Surrender Options; Systemic Risk (search for similar items in EconPapers)
JEL-codes: E44 E52 G22 G52 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2022-03
New Economics Papers: this item is included in nep-cfn, nep-ias, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_154_2022.pdf Second version, 2022 (application/pdf)

Related works:
Working Paper: Life insurance convexity (2023)
Working Paper: Life insurance convexity (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:154

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