ERM-412-17: Surrenders in the Life Insurance Industry (through Section 4)


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Key Takeaways:

  • Executive Summary
  • Introduction
  • Surrender behaviour under “normal circumstances”
    • Life Insurance policies serve long-term savings purposes and biometrical risk coverage
    • For simple cash generation purposes there are many options which are better and simpler than surrendering a life policy
    • Due to numerous surrender penalties and opportunity costs, withdrawing from a life policy should usually be among the least attractive options
    • It is reasonable to assume that most policyholders are aware of the disadvantages they face in the case of surrender
  • Surrender behaviour under extreme circumstances
    • Collapsing confidence in a company could lead to mass surrenders
    • Changes in the macroeconomic environment can bring up aggregate surrenders in the whole industry
    • Do institutional clients expose life insurance companies to a great surrender risk and can it be managed?
  • How insurance companies manage surrender risk
    • Insurance companies do not rely on short-term funding to finance their business model
    • Insurance companies design product features to meet the long-term needs of their policyholders
    • Liquidity demands will be inherently reflected in the product design of the different life insurance products
    • Insurance companies actively monitor and manage
    • Liquidity stress tests are an important part of an insurance company’s liquidity management
    • Liquidity management should be done at the group level but consideration should be given at the legal entity level