Abstract
This paper values equity-linked life insurance contracts with surrender guarantees for risk averse and loss averse policyholders in continuous time. With increasing risk aversion, policyholders surrender their insurances for higher values of the underlying equity fund, compared to an optimally stopped insurance contract, leading to substantial losses. Moreover, high discounting amplifies suboptimal surrender behavior. Loss averse policyholders display a different surrender behavior: Such policyholders surrender only policies for which the surrender benefit represents a large gain, while holding on to less successful contracts, so that the disposition effect increases the contract value relative to a contract stopped by a risk averse policyholder.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
