The Effect of Risk Aversion and Loss Aversion on Equity‐Linked Life Insurance With Surrender Guarantees

Christian Hilpert

Journal of Risk & Insurance, 2020, vol. 87, issue 3, 665-687

Abstract: We price equity‐linked life insurance with surrender guarantees and account for risk preferences in the form of risk‐averse and loss‐averse policyholders in continuous time. Risk‐averse policyholders surrender their policy for higher equity index values. Compared to optimally surrendered policies, this behavior creates substantial policy value losses. In contrast, loss‐averse policyholders surrender once the surrender benefit realizes a gain but keep under‐performing policies. This disposition effect reduces the policy value relative to both optimally surrendered policies and policies surrendered by risk‐averse policyholders. Insurers in competitive markets need to estimate their policyholders’ risk preferences accurately.

Date: 2020
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