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Adverse retention: Strategic renewal of guaranteed renewable term life insurance policies

Gene C. Lai, Hisashi Nakamura, Shinichi Yamamoto and Takau Yoneyama

Journal of Risk & Insurance, 2021, vol. 88, issue 4, 1001-1022

Abstract: This study examines adverse retention using guaranteed renewable level term life insurance policies as a sample. No additional underwriting or physical examination is performed at the time of renewal. Our results show adverse retention exists in retention decisions. Further, we also find that the degree of adverse retention increases with age and policy amount and decreases with time elapses. Our results are robust with respect to the trend of before and after the renewal. During the prerenewal period, we find the prerenewal mortality rate is not higher than the nonrenewal mortality rate which is opposite to the evidence of postrenewal period. We also find correlation between “residuals of lapse” and “residuals of fatalities” is positive, also implying adverse retention exists. Most empirical studies on adverse selection often face problems such as the role of underwriting, entanglement of adverse selection, moral hazard, and regulations. Our study is free of these problems.

Date: 2021
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Handle: RePEc:bla:jrinsu:v:88:y:2021:i:4:p:1001-1022