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Life insurance convexity

Author

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  • Grochola, Nicolaus
  • Gründl, Helmut
  • Kubitza, Christian
Abstract
Life insurers sell savings contracts with surrender options, which allow policyholders to prematurely receive guaranteed surrender values. These surrender options move toward the money when interest rates rise. Hence, higher interest rates raise surrender rates, as we document empirically by exploiting plausibly exogenous variation in monetary policy. Using a calibrated model, we then 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 year. We show that these fire sales are fueled by surrender value guarantees and insurers’ long-term investments. JEL Classification: G22, E44, E52, G52

Suggested Citation

  • Grochola, Nicolaus & Gründl, Helmut & Kubitza, Christian, 2023. "Life insurance convexity," Working Paper Series 2829, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20232829
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    References listed on IDEAS

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    Cited by:

    1. Grochola, Nicolaus & Browne, Mark Joseph & Gründl, Helmut & Schlütter, Sebastian, 2021. "Exploring the market risk profiles of U.S. and European life insurers," ICIR Working Paper Series 39/21, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    2. Koijen, Ralph S.J. & Lee, Hae Kang & Van Nieuwerburgh, Stijn, 2024. "Aggregate lapsation risk," Journal of Financial Economics, Elsevier, vol. 155(C).
    3. Cheng, Chunli & Hilpert, Christian & Miri Lavasani, Aidin & Schaefer, Mick, 2023. "Surrender contagion in life insurance," European Journal of Operational Research, Elsevier, vol. 305(3), pages 1465-1479.
    4. Sydow, Matthias & Fukker, Gábor & Dubiel-Teleszynski, Tomasz & Franch, Fabio & Gründl, Helmut & Miccio, Debora & Pellegrino, Michela & Gallet, Sébastien & Kotronis, Stelios & Schlütter, Sebastian & So, 2024. "Banks and non-banks stressed: liquidity shocks and the mitigating role of insurance companies," Working Paper Series 3000, European Central Bank.

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    More about this item

    Keywords

    Interest Rates; Life Insurance; Liquidity Risk; Surrender Options; Systemic Risk;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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