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Risk Management of Policyholder Behavior in Equity‐Linked Life Insurance
Author(s) -
MacKay Anne,
Augustyniak Maciej,
Bernard Carole,
Hardy Mary R.
Publication year - 2017
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/jori.12094
Subject(s) - surrender , hedge , annuity , actuarial science , equity (law) , incentive , life insurance , economics , life annuity , business , financial economics , finance , microeconomics , history , ecology , archaeology , pension , political science , law , biology
The financial guarantees embedded in variable annuity contracts expose insurers to a wide range of risks, lapse risk being one of them. When policyholders’ lapse behavior differs from the assumptions used to hedge variable annuity contracts, the effectiveness of dynamic hedging strategies can be significantly impaired. By studying how the fee structure and surrender charges affect surrender incentives, we obtain new theoretical results on the optimal surrender region and use them to design a marketable contract that is never optimal to lapse.