Life insurance convexity

Arbeitspapier

Life insurers sell savings contracts with surrender options, allowing policyholders to prematurely withdraw guaranteed surrender values. Surrender options move toward the money when interest rates rise. Hence, higher interest rates raise surrender rates, as we document for the German life insurance sector. Using a calibrated model, we estimate that surrender options would force insurers to sell up to 2% of their investments during an enduring interest rate rise of 25 bps per annum. The resulting price impact depends on insurers' investment behavior. Forced asset sales are amplified by insurers' long-term investments but mitigated by reducing the guarantees on surrender values.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECONtribute Discussion Paper ; No. 154

Classification and Topics

• Classification: Wirtschaft ; Insurance; Insurance Companies; Actuarial Studies ; Monetary Policy ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Life Insurance ; Liquidity Risk ; Interest Rates ; Fire Sales ; Systemic Risk

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kubitza, Christian ; Grochola, Nicolaus ; Gründl, Helmut
• Event: Veröffentlichung
• (who): University of Bonn and University of Cologne, Reinhard Selten Institute (RSI)
• (where): Bonn and Cologne
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/262098
• Last update: 10.03.2025, 11:41 AM CET