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Modeling paid-ups in life insurance products for risk management

Author

Listed:
  • David Anaya

    (University of Barcelona)

  • Lluís Bermúdez

    (University of Barcelona)

  • Jaume Belles-Sampera

    (Riskcenter-IREA, Grupo Catalana Occidente)

Abstract

Life insurance companies are subject to various risks related to universal life products. One such risk-paid-up-arises when policyholders, at some point before maturity, exercise their option to stop paying the periodic premiums initially agreed to for the life of the policy. Here, several predictive models are applied, aimed at anticipating the future state of in-force premium payment policies. This is undertaken in conjunction with balancing techniques, designed to avoid misclassification errors caused by the scarcity of paid-up events in our data. Using the findings from our predictive modeling, we initially identify certain policyholder profiles that seem less likely to paid-up premiums and consequently may be considered as potential targets for underwriting. Additionally, we delve into an essential aspect of policy design: surrender fees. Our analysis highlights a pattern where surrender fees, intended to mitigate surrender risk, may actually exacerbate the risk of policies becoming paid-up under certain circumstances.

Suggested Citation

  • David Anaya & Lluís Bermúdez & Jaume Belles-Sampera, 2024. "Modeling paid-ups in life insurance products for risk management," Risk Management, Palgrave Macmillan, vol. 26(3), pages 1-21, September.
    • Handle: RePEc:pal:risman:v:26:y:2024:i:3:d:10.1057_s41283-024-00146-4
    DOI: 10.1057/s41283-024-00146-4
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    References listed on IDEAS

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    1. Martin Eling & Michael Kochanski, 2013. "Research on lapse in life insurance: what has been done and what needs to be done?," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 14(4), pages 392-413, August.
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    3. Nadine Gatzert & Gudrun Hoermann & Hato Schmeiser, 2009. "The Impact of the Secondary Market on Life Insurers’ Surrender Profits," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(4), pages 887-908, December.
    4. Stephen Fier & Andre Liebenberg, 2013. "Life Insurance Lapse Behavior," North American Actuarial Journal, Taylor & Francis Journals, vol. 17(2), pages 153-167.
    5. David T. Russell & Stephen G. Fier & James M. Carson & Randy E. Dumm, 2013. "An Empirical Analysis of Life Insurance Policy Surrender Activity," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 36(1), pages 35-57.
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