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The Effect of Risk Aversion and Loss Aversion on Equity‐Linked Life Insurance With Surrender Guarantees
Author(s) -
Hilpert Christian
Publication year - 2020
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.12297
Subject(s) - surrender , equity (law) , economics , risk aversion (psychology) , life insurance , actuarial science , loss aversion , value (mathematics) , insurance policy , microeconomics , expected utility hypothesis , financial economics , archaeology , machine learning , political science , computer science , law , history
We price equity‐linked life insurance with surrender guarantees and account for risk preferences in the form of risk‐averse and loss‐averse policyholders in continuous time. Risk‐averse policyholders surrender their policy for higher equity index values. Compared to optimally surrendered policies, this behavior creates substantial policy value losses. In contrast, loss‐averse policyholders surrender once the surrender benefit realizes a gain but keep under‐performing policies. This disposition effect reduces the policy value relative to both optimally surrendered policies and policies surrendered by risk‐averse policyholders. Insurers in competitive markets need to estimate their policyholders’ risk preferences accurately.