Lapse risk in life insurance: correlation and contagion effects among policyholders' behaviors

We model lapse risk in life insurance by integrating the dynamic aspects of policyholders’ behaviors and the dependency of the lapse intensity on macroeconomic conditions. We introduce a mathematical framework where the... [ view full abstract ]

We model lapse risk in life insurance by integrating the dynamic aspects of policyholders’ behaviors and the dependency of the lapse intensity on macroeconomic conditions. We introduce a mathematical framework where the lapse intensity follows a dynamic contagion process, see Dassios and Zhao (2011), in order to capture both contagion and correlation potentially arising among insureds’ behaviors. An external market driven jump component affects the lapse intensity process as function of interest rates. Closed-form expressions and analytic sensitivities for the moments of the lapse intensity are provided, showing the impacts of massive copycat behaviors.