Life insurance convexity

Christian Kubitza, Nicolaus Grochola and Helmut Gründl

Journal of Banking & Finance, 2025, vol. 178, issue C

Abstract: Life insurers sell savings contracts with surrender options, which allow policyholders to prematurely 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 examine the impact of surrender options on insurers’ liquidity and portfolio rebalancing during an interest rate rise. We show how asset sales result from insurer balance sheet dynamics and explore their interaction with investment strategies and surrender value guarantees.

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)
Date: 2025
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Related works:
Working Paper: Life insurance convexity (2023)
Working Paper: Life Insurance Convexity (2022)
Working Paper: Life insurance convexity (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:178:y:2025:i:c:s0378426625001220

DOI: 10.1016/j.jbankfin.2025.107502

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