Surrender Value Research Articles

MODEL INVESTASI POLIS ASURANSI JIWA BERBONUS TIPE DWIGUNA DENGAN AMERICAN PUT OPTION

Insurance is a form of protection against the concept of risk transfer that may occur from an uncertain event. One type of insurance is life insurance. With the changing times, life insurance launched innovative products, one of which is endowment life insurance. Endowment life insurance is a type of life insurance that provides compensation benefits if the policy holder dies during the coverage period, as well as providing cash value and bonuses if the policy holder is still alive until the end of the period. This study aims to determine the fair price of insurance policies and the price of bonus life insurance policies. Determination of the value of the American put option with the binomial method using a numerical approach, the formulation of the portfolio model includes determining the model of the unit price with Geometric Brownian Motion, solving using Black-Scholes, determining the structure of the bonus life insurance policy with the formulation of a single premium payment, bonus rate, and benefits. then analyze the movement of the price of a reasonable bonus life insurance policy with a surrender option based on the age of the insured, technical rate, participation level, and volatility. The surrender value obtained is the difference between the value of the American Put option and the European Call Option. Based on the simulation, the conclusion of this analysis is that the price of the endowment type life insurance policy can be estimated using the binomial method at around 0.78 for a fair policy price and around 0.27 for a policy price with a surrender option. This gives an idea of the relative value of the policy price to the expected benefits under certain conditions, such as the death of the insured in the first year of the contract.

Discussion on the Tax Authorities' Perspective on Balancing the Execution of Surrender Value

Discussion on the Tax Authorities' Perspective on Balancing the Execution of Surrender Value

A Two-Part Beta Regression Approach for Modeling Surrenders and Withdrawals in a Life Insurance Portfolio

Beta regression is a flexible tool in modeling proportions and rates, but is rarely applied in th actuarial field. In this article, we propose its application in the context of policyholder behavior and particularly to model surrenders and withdrawals. Surrender implies the expiration of the contract and denotes the payment of the surrender value, which is contractually defined. Withdrawal does not imply the termination of the contract and denotes the payment of a cash amount, left to the discretion of the policyholder, within the limits of the surrender value. Moreover, the Actuarial Standard of Practice 52 states that, for surrender and withdrawal estimation, the actuary should take into account several risk factors that could influence the phenomenon. To this aim, we introduce a two-part Beta regression model, where the first part consists in the estimate of the number of surrenders and withdrawals by means of a multinomial regression, as an extension of the logistic regression model frequently used in the empirical literature just to estimate surrender. Then, considering the uncertainty on the amount withdrawn, we express it as a proportion of surrender value; in this way, it assumes values continuously in the interval and it is compliant with a Beta distribution. Therefore, in the second part, we propose the adoption of a Beta regression approach to model the proportion withdrawn of the surrender value. Our final goal is to apply our model on a real-life insurance portfolio providing the estimates of the number of surrenders and withdrawals as well as the corresponding cash amount for each risk class considered.

SOME CLARITY ON THE ACCRUAL OF LIVING ANNUITIES AT DEATH OR DIVORCE CM v EM (1086/2018) [2020] ZASCA 48; [2020] 3 All SA 1 (SCA); 2020 (5) SA 49 (SCA) (5 May 2020)

A conventional life annuity is a contract in terms whereof an annuity underwriter guarantees a periodical payment to an insured in exchange for an initial non-refundable premium. The insurer pools all the annuity premiums together and assumes both the investment performance and the mortality risk by way of actuarial comparisons. The annuitant’s income is guaranteed for life or for a minimum period.Living annuities on the other hand are regulated by the Long-Term Insurance Act 52 of 1998 and are market-linked investments (with no income guarantee) in respect of which the annuitant annually chooses the drawdown rate – currently between 2.5 and 17.5 per cent per annum (compare Regulations in terms of s 36 of the Pensions Act 24 of 1956 and s 106(1)(a) read with s 108(1) of the Financial Sector Regulation Act 9 of 2017.) When an annuitant dies, the death benefit is payable to a nominated beneficiary or the estate of the insured. A pension-interest benefit is an asset for the purposes of the division of an estate at divorce, and includes both pension and provident funds. Living annuities, however, do not fall within the definition of “pension interest” as defined in s 1 of the Divorce Act.In CM v EM ((1086/2018) [2020] ZASCA 48; [2020] 3 All SA 1 (SCA); 2020 (5) SA 49 (SCA) (5 May 2020)), the Supreme Court of Appeal, in an appeal from the full court of the Gauteng Division of the High Court, sitting as court of appeal, had the opportunity to determine where the ownership of capital invested in the form of a living annuity vests, as well as whether the value of an annuitant spouse’s right to future annuity payments is an asset in his or her estate and therefore subject to accrual. Accrual in respect of an estate is the amount by which the net value of the estate at the dissolution of a marriage exceeds the net value of that estate at the commencement of the marriage. At the dissolution of a marriage owing to death and subject to the accrual system, the spouse whose estate shows no accrual, or a smaller accrual than the estate of the other spouse, has a claim against the other spouse or his or her deceased estate.It is submitted that some implications of the accrual dispensation, particularly within the context of certain pension and financial products, are still in their discovery phase, nearly 40 years after their introduction. In the absence of any reference to a living annuity in an antenuptial contract, the question was always whether such an investment is subject to the accrual system at divorce or death. In the context of a life assurance policy, the surrender value of the policy was taken into account in the event of divorce, but in the event of death, the question was whether, for accrual purposes, the factor taken into account should be the surrender value or the policy proceeds. As only assets that form part of the estate of a spouse can be considered for accrual purposes, the very nature of a living annuity had to be investigated in the matter of CM v EM (supra). This case was an application for special leave to appeal from the full court in the matter of Emilio Pietro Valfredo Montanari v Charmaine Helen Montanari (Montanari v Montanari).

Life settlements: análisis descriptivo y aspectos cuantitativos

A life settlement is a financial transaction by which an existing life insurance policy is sold to an investor for a greater price than its cash surrender value. In this way, the investor undertakes to pay, if any, the outstanding premiums and has the right to receive the death benefit when the insured dies. This work carries out a descriptive analysis of this type of transaction and a study of its main quantitative aspects. Thus, among other aspects, an overview of the product is offered and its main agents, the nature of the parameters involved in its value and the risks related to it are described. In regards to the quantitative point of view, a new way of analysing the sensitivity of the price of a life settlement to changes in the insured’s life expectancy is introduced. Indeed, we extend the duration and convexity indicators of Stone and Zissu (2008), which use a deterministic approach, to the analytical framework provided by the probabilistic valuation method. Then, we propose to measure the sensitivity of this product to changes in the insured’s mortality multiplier, and not in their life expectancy. The paper also describes the applicability of the new measures for risk management purposes.

A Study of Life Internal Rate of Return

Life insurance, not included as a part of the legal obligation in some countries, is one of the investment approaches that might not stand high in the public favor for some people since this is a type of investments that the investor cannot know beforehand the exact return, and the returns completely depend on uncertainty of the policy specification in some circumstances. Similar to the other kinds of investment, investors in life insurance products have been seeking a tool for investment evaluation. However, currently there are no accurate tools that can provide the value of the investment in a life insurance product sensitive to the uncertainty. Internal rate of return is the basic tool that buyers or bankers may apply in order to find the rate of return of this type of investment. The investment decision tool is one of the most important keys that investors have utilized upon making their decisions on investments. Therefore, in this research, we propose a new mathematical model with applications for investment decision, being an extension of the internal rate of return by taking into account the life probability, considering different types of life insurance policies, and other factors specified on life insurance investments such as the premium, the death benefit, the maturity value, the sum insured, the lapse rate, the surrender value, the annuity certain, and the lapse rate with different genders and ages. This newly proposed model is named as the "Life Internal Rate of Return" or Life-IRR model. By using the sample data for both males and females aged 30 years old with expected benefit of 100,000 baht for different types of life insurance policies which are endowment plan, whole life plan and retirement plan, the results show that, for males, the highest life rate of returns is that obtained from the retirement plan (3.633692%), and the lowest life internal rates of returns is that obtained from the endowment plan (2.384443%), while the whole life plan offers moderate life rate of returns of 2.427941%. For females, the highest life rate of returns is that obtained from the retirement plan (3.335189%), and the lowest life internal rates of returns is that obtained from the whole life plan (2.104658%), while the endowment plan offers moderate life rate of returns of 2.308062%. The sensitivity analyses of the life internal rates of return perform the natural characteristics of life insurance.

Viaticals in the COVID-19 Pandemic Era

Viaticals are life insurance settlement contracts where the investor purchases a life insurance policy from a terminally ill policyholder. In these cases, the present value of the policyholder’s cash flows is substantially above the cash surrender value and below the face value of the policy. The COVID-19 virus (also referred to as SARS-CoV-2 or the coronavirus) has killed and shortened the expected lifespan of many victims, much like HIV-AIDS and other terminal illnesses. This paper suggests a valuation model for a life settlement contract as the framework to contrast the usefulness of viatical contracts during the current COVID-19 pandemic compared to the HIV/AIDS crisis. Contrasting the diseases leads us to believe that viaticals are less useful for dying COVID-19 victims, although they may prove useful for a subset of COVID-19 survivors who suffer life-shortening organ damage.

배경위험 하에서의 최적보험계약과 해약환급금에 관한 연구

배경위험 하에서의 최적보험계약과 해약환급금에 관한 연구

Construction and Analysis of Actuarial Model of the Influence of Personal Tax Deferred Commercial Pension Insurance on Personal Pension Wealth in China

Taking mortality distribution, surrender value, and tax relief factors into consideration, the authors construct an actuarial model for the influence of personal income tax deferred commercial pension insurance on changes in personal pension wealth and adopts a numerical simulation to deliver the corresponding changes in personal pension wealth to different initial insured age and different initial insured annual salary. In order to better measure the security level of the commercial pension insurance, the model for the net replacement rate of pension of the commercial pension insurance was further constructed. The results show that the effect of participating in the personal income tax deferred commercial pension insurance on the present value of personal pension wealth depends on the combined action of the initial insured age and the initial annual salary. Under the same insured age, because men retire later and work longer than women, men can obtain a higher accumulation of personal pension wealth than women. For insured persons with different income levels, high-income groups can obtain higher personal pension wealth growth, and although low-income groups cannot obtain higher personal pension wealth growth, they can obtain a significant increase in the pension replacement rate by participating in the insurance, thereby better guaranteeing their living standards after retirement. Regardless of the income level, tax relief can be obtained once participating in the insurance, but the value may vary. The optimal tax-saving age for men is 23 years old, and for women 25 years old.

Life insurance and life settlement markets with overconfident policyholders

We analyze how the life settlement market—the secondary market for life insurance—may affect consumer welfare in a dynamic equilibrium model of life insurance with one-sided commitment and overconfident policyholders. In our model, policyholders may lapse their life insurance policies when they lose their bequest motives; however, they are overconfident in the sense that they may underestimate the probability of losing their bequest motives. We show that in the competitive equilibrium without life settlement, overconfident consumers will buy life insurance contracts with “too much” reclassification risk insurance for later periods. The life settlement market can impose a limit on the extent to which primary insurers can exploit overconfident consumers. We show that the life settlement market may increase the equilibrium consumer welfare of overconfident consumers when they are sufficiently “vulnerable” in the sense that they have a sufficiently large intertemporal elasticity of substitution of consumption. Our result is robust to alternative specifications where (i) insurers cannot observe the subjective or objective probability that policyholders will lose their bequest motives; (ii) insurers can include health-contingent cash surrender values (CSVs) in the life insurance contract; and (iii) policyholders underestimate their future mortality risk.

PERHITUNGAN PROFIT ASURANSI UNIT LINK DENGAN SURRENDER VALUE MENGGUNAKAN METODE PROFIT TESTING

Life insurance with surrender value is a type of insurance that allows the insured to cancel the contract. Unit-link life insurance is a combination of life insurance and investment. Profit testing method is used to find out the potensial loss or gain of unit link life insurance product. The aim of this research was to determine the potential benefits or losses of unit-linked life insurance product using a deterministic model. Results of this research are the profit obtained by the insurance company for an insurance participant aged 35 years with a sum and in annual premiums are

A Study on the Non-Cash Surrender Value Type Insurance Policy

A Study on the Non-Cash Surrender Value Type Insurance Policy

Pricing a Lease Contract in Presence of Late Payment Extra-Charges

Partial insolvency in leasing contracts may entail to afford additional late payment costs. In this paper we focus on the case that the lessee makes partial payments in due time and settles the debt augumented by the late payment interests later. The presence of the extra-costs drives the lease Effective Annual interest Rate (EAR) to deviate from the lease contract rate. The aim of this work is to illustrate how design the contract payback amortization to stick EAR to the lease contract rate, when the lease contract rate, the late payment rate and the contract term are exogeneously fixed. First we achieve a proxy for EAR given by the lease contract rate plus an extra-charge rate addendum. We show that this latter addendum is sensitive to the payback Macaulay Duration, a weighted size and timing average. Specifically, the longer the Macaulay Duration, the smaller the extra-charge rate addendum. As a consequence, two general rules to drive EAR close to the lease contract rate roll out, specifically: (1) the payment pattern should be set with a long Macaulay Duration; and (2) the surrender value of the leased good should be put large. As the contract settlement is given, we show that EAR is delimited by a lower bound and an upper bound. Then the payback amortizations with fixed instalments are studied. To get insight on the importance of EAR inputs we roll sensitivity analysis out through illustrative applications. The results of the paper are useful to provide policymakers a better knowledge about the effects on EAR of the contract conditions on the pattern of payments.

Life Insurance and Life Settlements: The Case for Health‐Contingent Cash Surrender Values

AbstractWe investigate why life insurance policies in practice either do not have a cash surrender value (CSV), or have CSVs that are small and are not adjusted for health status. We show that including health‐contingent CSVs in a life insurance contract causes a dynamic commitment problem, which makes it more costly up front for policyholders to purchase long‐term contracts (because some poor risks who would otherwise have lapsed can and will now capture the CSV instead). To the extent that life insurance policyholders’ incomes tend to increase over the course of the policy, policyholders are not willing to accept higher ex ante premium costs in return for the extra liquidity provided by the CSV. Because health‐contingent CSVs act in a similar way to a life settlement market, we also study the life insurers’ equilibrium choice of CSVs in the presence of a life settlement market. We find that optimally chosen CSVs can partially mitigate the consumer welfare loss caused by the settlement market (as in Daily, Hendel, and Lizzeri, 2008), but only if the CSVs are allowed to be contingent on health status.

Saving Face: A Solution to the Hidden Crisis for Life Insurance Policyholders

The total face amount of terminated life insurance in the U.S. amounts to over two trillion dollars per annum. This implies a gigantic windfall profit for insurance carriers, who may keep the premiums paid until termination and avoid the death benefit payout. Little known is that many policyholders could realize their policies’ value through resale to the secondary market, and receive a lump-sum markedly above the surrender value. We demonstrate how a contract provision requiring a mandatory offer in the secondary market would benefit the welfare of policyholders without negatively affecting that of insurance companies.

Life Insurance and Life Settlements: The Case for Health-Contingent Cash Surrender Values

We investigate why life insurance policies in practice either do not have a cash surrender value (CSV), or have cash surrender values that are small and are not adjusted for health status. We show that including health-contingent CSVs to a life insurance contract causes a dynamic commitment problem, which makes it more costly up front for policyholders to purchase long term contracts (because some poor risks who would otherwise have lapsed can and will now capture the cash surrender value instead). To the extent that life insurance policyholders’ incomes tend to increase over the course of the policy, policyholders are not willing to accept higher ex ante premium costs in return for the extra liquidity provided by the cash surrender value. Because health-contingent CSVs act in a similar way to a life settlement market, we also study the life insurers’ equilibrium choice of cash surrender values in the presence of a life settlement market. We find that optimally chosen cash surrender values can partially mitigate the consumer welfare loss caused by the settlement market (as in Daily et al., 2008), but only if the cash surrender values are allowed to be contingent on health status.

Surrender Risk in the Context of the Quantitative Assessment of Participating Life Insurance Contracts under Solvency II

Participating life insurance contracts entitle the policyholder to participate in the company’s annual surplus. Typically, they are also equipped with a surrender option that allows the policyholder to terminate the contract prior to maturity, receiving a predetermined surrender value. The option interacts with (often cliquet-style) interest guarantees that are a key feature of traditional participating contracts. Surrender options can considerably affect an insurer’s liabilities and bear material risks. This paper addresses the recognition of those risks in the quantitative assessment of a heterogeneous insurance portfolio under Solvency II, taking into account the complex interrelation between minimum interest guarantees, reserving requirements, and profit sharing. The lapse risk module of the Solvency II standard formula requires the identification of portfolio segments that are exposed to a specific change of surrender rates (long-term increase/decrease, one-off increase). We provide a heuristic that identifies homogeneous risk groups in the sense that the respective stress would increase the insurer’s liabilities. Our approach can be used to derive an appropriate segmentation in practical applications. We further analyze implications of the segmentation on the Risk Margin (as part of the Technical Provisions under Solvency II) and discuss consequences of policyholder options on the calculation of Going Concern Reserve and Surplus Funds. To illustrate our findings, we set up a stochastic balance sheet and cash flow projection model for a stylized life insurance company. We conclude that current methods used for practical applications underestimate surrender risk under Solvency II and that the proposed modeling refinements may improve the appropriateness of solvency ratios for participating business.

Determinants of Life Insurance Policy Surrenders

Life insurance policies assist individuals maintain the value of their money and build savings to be used in the future. However in times of crisis their attitude may change. On one hand, they have an interest in keeping their policies, as they can be used to cover their future, medium-term or long-term needs in case of retirement or death. On the other hand, they may need the premium money or the accumulated savings to meet short-term needs so they lapse or surrender them—when a surrender value exists. A natural question is what are the drivers of the behavior of the insured? When do they decide to stop them and when do they choose to maintain them? We use linear regression to identify how certain main macroeconomic variables (Gross Domestic Product (GDP) per capita growth, unemployment, inflation, short-term and long term interest rates, and consumer confidence index) can explain the behavior of the insured towards keeping or interrupting their life insurance policy. We do that for pension savings (pure and plain vanilla endowment—including pensions), term life, whole life and unit linked individual policies.

Surrender Risk in Life Insurance Policies

Life insurance often embeds a surrender option that gives the policyholders a right to exchange an existing contract for its cash surrender value. Similar to mortgage prepayment option that imposes a cash-flow risk to MBS investors, this surrender option is a source of concern for life insurers. While prior studies have attempted to quantify this surrender risk by pricing the surrender option, a common theoretical assumption imposed is a fully rational response of policyholders to only interest rates. However, actual surrender experience indicates that interest rates are just one of the multiple factors that drive the surrender decision and policyholders' response is not necessarily optimal. This paper integrates an empirical surrender function into the option pricing framework by employing a novel data set from a large life insurance industry experience study. It shows, for the first time in the literature, that policy vintage is a particularly significant and meaningful factor in addition to macroeconomic variables that impact surrender activity. Using these empirics, I find that the experience-based value of the surrender option is substantially less than its fully rational counterpart. In addition, the competitive landscape of the life insurance industry and the interest rate environment both play an important role in assessing the surrender risk exposure of life insurers.

LIFELONG HEALTH INSURANCE COVERS WITH SURRENDER VALUES: UPDATING MECHANISMS IN THE PRESENCE OF MEDICAL INFLATION

AbstractThis paper considers the problem of a lifelong health insurance cover where medical inflation is not sufficiently incorporated in the level premium determined at policy issue. We focus on the setting where changes in health benefits, driven by medical inflation, are accounted for by an appropriate update or indexation of the level premium, the policy value, or both premium and policy value, during the term of the contract. Such an updating mechanism is necessary to restore the actuarial equivalence between future health benefits and surrender values on the one hand, and available policy values and future premiums on the other hand. We extend existing literature (Vercruysse et al., 2013; Denuit et al., 2017) by developing updating mechanisms in a discrete-time framework, where medical inflation is only taken into account ex-post as it emerges over time and where surrender values are allowed for. We propose and design two types of surrender values: based on the ageing provision on the one hand and based directly on the premiums paid until surrender on the other hand. We illustrate our updating strategy with numerical examples, using Belgian data, and investigate the sensitivity of our findings with respect to elements from the technical basis (in particular: the lapse rates) used in the actuarial calculations. Our updating mechanism is generic and useful for a wide range of products in life and health insurance, where some elements of the technical basis are guaranteed while others are subject to revision according to policy conditions.