Intensity-based framework for surrender modeling in life insurance

Vincenzo Russo, Rosella Giacometti and Frank Fabozzi ()

Insurance: Mathematics and Economics, 2017, vol. 72, issue C, 189-196

Abstract: In this paper, we propose an intensity-based framework for surrender modeling. We model the surrender decision under the assumption of stochastic intensity and use, for comparative purposes, the affine models of Vasicek and Cox–Ingersoll–Ross for deriving closed-form solutions of the policyholder’s probability of surrendering the policy. The introduction of a closed-form solution is an innovative aspect of the model we propose. We evaluate the impact of dynamic policyholders’ behavior modeling the dependence between interest rates and surrendering (affine dependence) with the assumption that mortality rates are independent of interest rates and surrendering. Finally, using experience-based decrement tables for both surrendering and mortality, we explain the calibration procedure for deriving our model’s parameters and report numerical results in terms of best estimate of liabilities for life insurance under Solvency II.

Keywords: Life insurance; Surrender option; Intensity-based models; Vasicek model; Cox–Ingersoll–Ross (CIR) model; Best estimate of liabilities (BEL) (search for similar items in EconPapers)
JEL-codes: C02 C60 G22 G32 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:72:y:2017:i:c:p:189-196

DOI: 10.1016/j.insmatheco.2016.11.001

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