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Adverse retention: Strategic renewal of guaranteed renewable term life insurance policies

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  • Gene C. Lai
  • Hisashi Nakamura
  • Shinichi Yamamoto
  • Takau Yoneyama

Abstract

This study examines adverse retention using guaranteed renewable level term life insurance policies as a sample. No additional underwriting or physical examination is performed at the time of renewal. Our results show adverse retention exists in retention decisions. Further, we also find that the degree of adverse retention increases with age and policy amount and decreases with time elapses. Our results are robust with respect to the trend of before and after the renewal. During the prerenewal period, we find the prerenewal mortality rate is not higher than the nonrenewal mortality rate which is opposite to the evidence of postrenewal period. We also find correlation between “residuals of lapse” and “residuals of fatalities” is positive, also implying adverse retention exists. Most empirical studies on adverse selection often face problems such as the role of underwriting, entanglement of adverse selection, moral hazard, and regulations. Our study is free of these problems.

Suggested Citation

  • Gene C. Lai & Hisashi Nakamura & Shinichi Yamamoto & Takau Yoneyama, 2021. "Adverse retention: Strategic renewal of guaranteed renewable term life insurance policies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(4), pages 1001-1022, December.
  • Handle: RePEc:bla:jrinsu:v:88:y:2021:i:4:p:1001-1022
    DOI: 10.1111/jori.12338
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    References listed on IDEAS

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    1. Roger Feldman & Jennifer Schultz, 2004. "Consumer Demand for Guaranteed Renewability in Health Insurance," Journal of Consumer Policy, Springer, vol. 27(1), pages 75-97, March.
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    4. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84, March.
    5. Chiappori, Pierre-Andre & Salanie, Bernard, 1997. "Empirical contract theory: The case of insurance data," European Economic Review, Elsevier, vol. 41(3-5), pages 943-950, April.
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    7. Altman, Daniel & Cutler, David M & Zeckhauser, Richard J, 1998. "Adverse Selection and Adverse Retention," American Economic Review, American Economic Association, vol. 88(2), pages 122-126, May.
    8. Annette Hofmann & Mark Browne, 2013. "One-sided commitment in dynamic insurance contracts: Evidence from private health insurance in Germany," Journal of Risk and Uncertainty, Springer, vol. 46(1), pages 81-112, February.
    9. Yamamoto, Shinichi & 山本, 信一 & Yoneyama, Takau & 米山, 高生 & Kwon, W. Jean, 2014. "Asymmetric Information In Life Insurance: Difference Between Whole Life And Term Life," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 48(1), pages 99-117, October.
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    Cited by:

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    2. Nataliya Vnukova & Daria Davydenko & Svitlana Achkasova & Olexandr Yagolnitskyi, 2022. "Assessing the Activities of Insurance Companies Due to the Disease of Private Pension," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 179-194.

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