Guaranteed renewable life insurance under demand uncertainty

Michael Hoy, Afrasiab Mirza*, Asha Sadanand

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

186 Downloads (Pure)

Abstract

Guaranteed renewability (GR) is a prominent feature in many health and life insurance markets. We develop a model that includes unpredictable (and unobservable) fluctuations in demand for life insurance as well as changes in risk type (observable) over individuals' lifetimes. The presence of demand type heterogeneity leads to the possibility that optimal GR contracts may have a renewal price that is either above or below the actuarially fair price of the lowest risk type in the population. Individuals whose type turns out to be high risk but low demand renew more of their GR insurance than is efficient due to the attractive renewal price. This results in imperfect insurance against reclassification risk. Although a first-best efficient contract is not possible in the presence of demand type heterogeneity, the presence of GR contracts nonetheless improves welfare relative to an environment with only spot markets.

Original languageEnglish
JournalJournal of Risk and Insurance
Early online date17 Jul 2020
DOIs
Publication statusE-pub ahead of print - 17 Jul 2020

Keywords

  • demand uncertainty
  • guaranteed renewability
  • insurance
  • reclassification risk

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Guaranteed renewable life insurance under demand uncertainty'. Together they form a unique fingerprint.

Cite this