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CAE Research on Policyholder Behavior

Overview

The CAE grant “Structural Models of Policyholder Behavior” started in 2011 and the funding period ended in 2014, although the research continues.

The key point of the research project is to understand what drives policyholder exercise behavior, and what are the repercussions on practical risk management and valuation models. As a first step, we analyze optimal policyholder behavior within economic models for specific contract types. As a second step, we then leverage these results to draw broader conclusions on the relevant risk drivers and implications of risky policyholder behavior.

Pertaining to the first step, we analyze optimal transfer behavior in Variable Annuities with a Guaranteed Minimum Death Benefit / GMDB (Gao and Ulm, 2012, 2015), withdrawal behavior in Variable Annuities with a Guaranteed Minimum Withdrawal Benefit / GMWB (Moenig and Bauer, 2015), transfers in guaranteed funds (Ulm, 2015), and optimal surrender/settlement decisions in life insurance (Zhu and Bauer, 2011, 2013). Moreover, we consider the relevance of the models by examining their consistency with observed decisions (e.g. in the case of life settlements; Bauer, Russ, and Zhu, 2015) or observed prices (e.g. in the case of GMWBs; Moenig and Bauer, 2015). We find that in the context of products with complicated option-like features such as GMDBs, GMWBs, or interest rate guarantees, risk aversion and value maximization are key drivers for policyholder behavior. Which aspect dominates depends on the “degree of market completeness,” i.e. to what extent a particular product enhances the span of desirable consumption patterns. For conventional life insurance, on the other hand, private information on the health status affects surrender and settlement decisions (Bauer, Russ, and Zhu, 2015).

These findings have consequences for the risk and valuation of insurance products. In particular, policyholder behavior has repercussions on insurance product design, it considerably affects risk-based capital levels, and it can be relevant for the welfare implications of insurance markets. The key challenge for the last part of our research is the exploration of practical guidelines for managing risk associated with policyholder exercise behavior.


Primarily Involved Researchers

  • Daniel Bauer (Principal Investigator) is New York Life Associate Professor of Risk Management and Insurance at Georgia State University (CAE)
  • Eric R. Ulm, PhD, FSA, MAAA is Clinical Assistant Professor of Risk Management and Insurance at Georgia State University (CAE) and the Director of the Actuarial Program
  • Jin Gao, PhD, ASA is Assistant Professor of Actuarial Science at Lingnan University. He graduated from Georgia State University in 2011
  • Thorsten P. Moenig, PhD is Assistant Professor of Actuarial Science at University of St. Thomas (CAE). He graduated from Georgia State University in 2012
  • Nan Zhu, PhD, FSA is Assistant Professor of Actuarial Science at Illinois State University (CAE). He graduated from Georgia State University in 2012.

Publications Associated with the Research Project

  • Bauer, Daniel, Jin Gao, Thorsten Moenig, Eric Ulm, and Nan Zhu, 2014. “Policyholder Exercise Behavior in Life Insurance: The State of Affairs”, revision submitted to the North American Actuarial Journal
  • Bauer, Daniel, Jochen Russ, and Nan Zhu, 2014. “Adverse Selection in Secondary Insurance Markets: Evidence from the Life Settlement Market”, submitted
  • Gao, Jin and Eric R. Ulm, 2012. “Optimal Consumption and Allocation in Variable Annuities with Guaranteed Minimum Death Benefits” published in Insurance: Mathematics and Economics
  • Gao, Jin and Eric R. Ulm, 2015. “Optimal Allocation and Consumption with Guaranteed Minimum Death Benefits with Labor Income and Term Life Insurance” published in Insurance: Mathematics and Economics
  • Gao, Jin and Eric R. Ulm, 2015. “The Effect of Labor Income and Health Uncertainty on the Valuation of Guaranteed Minimum Death Benefits”, submitted
  • Moenig, Thorsten P. and Daniel Bauer, 2014. “Revisiting the Risk-Neutral Approach to Optimal Policyholder Behavior: A Study of Withdrawal Guarantees in Variable Annuities” published in the Review of Finance
  • Moenig, Thorsten P. and Daniel Bauer, 2013. “On Negative Option Values in Personal Savings Products”, working paper
  • Ulm, Eric R., 2015 “On the Interaction between Transfer Restrictions and Crediting Strategies in Guaranteed Funds”, submitted
  • Zhu, Nan and Daniel Bauer, 2013. “Coherent Pricing of Life Settlements Under Asymmetric Information” published in the Journal of Risk and Insurance

Conference and Seminar Presentations

“Optimal Consumption and Allocation in Variable Annuities with Guaranteed Minimum Death Benefits” presented at:

  • 44th Actuarial Research Conference, Madison, WI (July 2009)
  • Second World Risk and Insurance Economics Congress (ARIA Section), Singapore (July 2010)
  • Research Seminar at the University of Wisconsin (September 2010)

“Optimal Allocation and Consumption with Guaranteed Minimum Death Benefits with Labor Income and Term Life Insurance” presented at:

  • 2011 American Risk and Insurance Association Annual Meeting, San Diego, CA (August 2011)
  • 47th Actuarial Research Conference, Winnipeg, Manitoba (August 2012)
  • Research Seminar at Penn State University in (March 2013)

“Revisiting the Risk-Neutral Approach to Optimal Policyholder Behavior: A Study of Withdrawal Guarantees in Variable Annuities” presented at:

  • 2011 AFIR & ASTIN Colloquia, Madrid, Spain (June 2011)
  • 2011 American Risk and Insurance Association Annual Meeting, San Diego, CA (August 2011)
  • 46th Actuarial Research Conference, Storrs, CT (August 2011)
  • 12th Symposium on Finance, Banking, and Insurance, Karlsruhe, Germany (December 2011)
  • 47th Actuarial Research Conference, Winnipeg, Manitoba
  • Perspectives on Actuarial Risks in Talks of Young Researchers (PARTY) conference, Ascona, Switzerland (January 2013)
  • 2013 Allied Social Science Associations Meetings, San Diego, CA (January 2013)
  • Ameriprise Actuarial Community Luncheon, Minneapolis, MN (May 2013)
  • Research Seminars at Ulm University (December 2011), University of Manitoba (January 2012), Manhattan College (January 2012), University of St. Thomas (February 2012), University of Wisconsin-Madison (February 2012), University of Minnesota (April 2013), Twin Cities Actuarial Club (December 2013)

“Coherent Pricing of Life Settlements Under Asymmetric Information” presented at:

  • Seventh International Longevity Risk and Capital Markets Solutions Conference, Frankfurt, Germany (September 2011)
  • 2012 Financial Management Association Annual Meeting, Atlanta, GA (October 2012). Semifinalist for the Best Paper Award in Investments, included in the Top-Ten Session

“On Negative Option Values in Personal Savings Products” presented at:

  • 2013 Asia-Pacific Risk and Insurance Association Annual Meeting, New York, NY (July 2013)
  • 48th Actuarial Research Conference, Philadelphia, PA (August 2013)

“Adverse Selection in Secondary Insurance Markets: Evidence from the Life Settlement Market” presented at:

  • 3rd joint Statistical Meeting DAGStat 2013, Freiburg, Germany (March 2013)
  • NBER insurance project workshop (March 2014)
  • CEAR workshop on longevity risk (March 2014)
  • European Meeting of the Econometrical Association (jointly with the Meeting of the European Economic Association, August 2014, scheduled)
  • Research Seminars at Georgia State University (March 2013), St. John’s University (April 2014), St. Thomas University (May 2014)