Lethal lapses: How a positive interest rate shock might stress German life insurers

Mark Feodoria and Till Förstemann

No 12/2015, Discussion Papers from Deutsche Bundesbank

Abstract: Life insurers typically grant policyholders a surrender option. We demonstrate that the resulting lapse risk could materialise in the form of a "policyholder run" if interest rates were to increase sharply. An inverse stress test based on a unique set of regulatory panel data suggests that German life insurers have become less resistant to an upward interest rate shock in the course of the financial and sovereign debt crisis from 2007 to 2011. Despite the challenges presented by the low-interestrate environment, the situation has not deteriorated since then. In light of the quantitative easing (QE) of monetary policy in the euro area, life insurers may find it difficult to continue this positive trend.

Keywords: life insurance; interest rate risk; lapse risk; rational policyholder run; inverse stress test (search for similar items in EconPapers)
JEL-codes: C13 C72 G22 G33 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-eec, nep-ias and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:122015

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