Estimating Extreme Cancellation Rates in Life Insurance

Abstract

This paper assesses the risk of a mass lapse event in life insurance. The rarity of the event and the complexity of policyholder behavior make the risk assessment of such a scenario difficult. Using a simulation study, we evaluate how different estimation methods can assess the risk of this scenario, using panel data at the company level. We then use the best-performing method to estimate the probability distribution function of a mass cancellation event in the United States and Germany. We identify dependencies of the event on company and country characteristics, which have not been taken into account by regulating agencies. We also find that the current mass lapse scenario in Solvency II has no empirical foundation for the German market. We show that an empirically valid scenario leads to a significantly lower solvency capital requirement for the average German life insurer.

Financial Performance Of Sharia Life Insurance Companies In Indonesia

“…The findings of this study are in line with the investigation made by Bawa & Chattha (2013) and Mwangi & Murigu (2015). This study identifies dependencies of the event on company and country characteristics, which need to be considered by regulating agencies (Biagini et al, 2020). Some Sharia life insurance companies in Indonesia have risk-based capital below 120%.…”

“…With risk-based capital, insurance companies have ensured that they have funds to pay claims submitted. An empirically realistic scenario results in a much reduced solvency capital requirement for the typical German life insurance business, in contrast to the findings of prior studies (Biagini et al, 2020). In the United Kingdom, insurance is ranked as the largest across the European Union and the third largest globally.…”