Life insurance convexity

Christian Kubitza, Nicolaus Grochola and Helmut Gründl

No 42/21, ICIR Working Paper Series from Goethe University Frankfurt, International Center for Insurance Regulation (ICIR)

Abstract: Life insurers massively sell savings contracts with surrender options which allow policyholders to withdraw a guaranteed amount before maturity. These options move toward the money when interest rates rise. Using data on German life insurers, we estimate that a 1 percentage point increase in interest rates raises surrender rates by 17 basis points. We quantify the resulting liquidity risk in a calibrated model of surrender decisions and insurance cash flows. Simulations predict that surrender options can force insurers to sell up to 3% of their assets, depressing asset prices by 90 basis points. The effect is amplified by the duration of insurers' investments, and its impact on the term structure of interest rates depends on life insurers' investment strategy.

Keywords: Life Insurance; Liquidity Risk; Interest Rates; Fire Sales; Systemic Risk (search for similar items in EconPapers)
JEL-codes: E52 G22 G28 G32 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ias, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://www.econstor.eu/bitstream/10419/247672/1/1780015232.pdf (application/pdf)

Related works:
Working Paper: Life insurance convexity (2023)
Working Paper: Life Insurance Convexity (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:icirwp:4221

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