The Impacts of Surrender Options on Reserve Durations |
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| Authors: | Chenghsien Tsai |
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| Institution: | 1. Chenghsien Tsai is a Professor at the Department of Risk Management and Insurance, National Chengchi University, Taiwan;2. phone: +886–2-2936–9647;3. fax: +886–2-2939–3864;4. e-mail: ctsai@nccu.edu.tw. The author is grateful to Zn-Hong Chen, Cheng-Mao Su, and Fang-Shu Chan for their competent programming assistance, to the Fulbright Scholar Program and the National Science Council of Taiwan (Project numbers NSC 93–2416-H-004–041 and NSC 96–2416-H-004–026-MY3) for the financial support, and to Georgia State University and Santa Clara University for the kind support extended during the visit of the author. The major portion of the research was completed while the author was visiting these universities. This article was subject to double-blind peer review. |
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| Abstract: | Estimating the interest rate risk of life insurance reserves is essential for insurers, and surrender options are critical to the estimation. This article advances our understanding of how surrender options affect the durations of reserves. We identify a pattern of the reserve duration with respect to the interest rate that is important in explaining how surrender rate levels and the interest-rate sensitivity of surrenders affect reserve durations. We further found that the surrender behavior that is more positively related to the interest rate produces larger/smaller effective dollar durations when the interest rate is low/high. |
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