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The Distributions of Policy Reserves Considering the Policy‐Year Structures of Surrender Rates and Expense Ratios
Author(s) -
Tsai Chenghsien,
Kuo Weiyu,
Chiang Derek MiHsiu
Publication year - 2009
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2009.01324.x
Subject(s) - surrender , economics , convexity , monetary economics , econometrics , financial economics , law , political science
In this article, we examine how the policy‐year structures of expense ratios and surrender rates affect the distributions of policy reserves. Our results show that a convex expense ratio curve, though reduces the mean and the uncertainty of reserves, could make the beneficial impact of surrenders on insurers become detrimental. Our results also show that the convexity of the surrender rate curve is favorable to insurers while the volatilities of surrender rates are unfavorable. We further find that neglecting the policy‐year structures of surrender rates and expense ratios may result in overestimation of the mean and the uncertainty of reserves.