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Unit-Linked Life Insurance Contracts with Lapse Rates Dependent on Economic Factors

Published online by Cambridge University Press:  10 May 2011

A. W. Kolkiewicz  and
K. S. Tan
A. W. Kolkiewicz
Affiliation:
Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada., Email: wakolkie@uwaterloo.ca
K. S. Tan
Affiliation:
Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada; and China Institute for Actuarial Science, Central University of Finance and Economics, Beijing, China. E-mail: kstan@uwaterloo.ca
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Abstract

Many recently introduced unit-linked life insurance policies contain provisions allowing policyholders to lapse the product. The problem of pricing this surrender option is difficult as it involves modelling lapse decisions which may be contingent on different factors. This paper develops a methodology which enables us to model lapse behaviour within a framework provided by developments in financial economics. Using marked point processes with stochastic intensities, we present an approach which accounts for changes in the lapse behaviour of policyholders due to different economic factors. As a result, the model produces more accurate financial values for insurance contracts contingent on financial markets. In the context of unit-linked policies, we illustrate the method by allowing the lapse decision to depend on the stochastic volatility of the underlying asset. Our simulation study indicates that there is a strong relation between the single premiums of these policies and the lapse behaviour.

Keywords

Unit-Linked Life InsuranceFinancial RiskLapse RatesMarked Point ProcessStochastic Volatility
Type
Papers
Information
Annals of Actuarial Science , Volume 1 , Issue 1 , March 2006 , pp. 49 - 78
Copyright
Copyright © Institute and Faculty of Actuaries 2006

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