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The Effect of Secondary Markets on Equity‐Linked Life Insurance With Surrender Guarantees
Author(s) -
Hilpert Christian,
Li Jing,
Szimayer Alexander
Publication year - 2014
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.1539-6975.2013.12003.x
Subject(s) - surrender , equity (law) , life insurance , secondary market , business , monetary economics , economics , finance , actuarial science , political science , stock exchange , law , archaeology , history
Many equity‐linked life insurance products offer the possibility to surrender policies prematurely. Secondary markets for policies with surrender guarantees influence both policyholders and insurers. We show that secondary markets lead to a gap in policy value between insurer and policyholder. Insurers increase premiums to adjust for higher surrender rates of customers and optimized surrender behavior by investors acquiring the policies on secondary markets. Hence, the existence of secondary markets is not necessarily profitable for the primary policyholders. The result depends on the demand for and the supply of the contracts brought to the secondary markets.