Commitment and Lapse Behavior in Long‐Term Insurance: A Case Study |
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| Authors: | Jean Pinquet Montserrat Guillén Mercedes Ayuso |
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| Institution: | 1. Jean Pinquet works with Département d’Economie, Université Paris Ouest‐Nanterre and Ecole Polytechnique;2. Montserrat Guillén and Mercedes Ayuso are from the University of Barcelona;3. Jean Pinquet can be contacted via e‐mail: jpinquet@free.fr. |
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| Abstract: | This article presents a case study of a portfolio of individual long‐term insurance contracts sold by a Spanish mutual company. We describe the risk levels, the rating structure, and the implied cross‐subsidies on a portfolio of policies providing health, life, and long‐term care insurance. We show evidence of reclassification risk through the history of disability spells. We also analyze the lapse behavior and seek to provide a rationale for the portfolio’s dynamics. We discuss the lack of commitment from the policyholders (lapses) and from the mutual company (which took a run‐off decision). Finally, we draw conclusions regarding the design of such contracts. |
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