Template-Type: ReDIF-Paper 1.0
Title: The Effect of Secondary Markets on Equity-Linked Life Insurance with Surrender Guarantees 
Author-Name: Christian Hilpert
Author-Email: chilpert@uni-bonn.de
Author-Name: Jing Li
Author-Email: lijing@uni-bonn.de
Author-Name: Alexander Szimayer
Author-Email: alexander.szimayer@wiso.uni-hamburg.de
Classification-JEL: G13, G22, C65 
Keywords: equity-linked life insurance contracts,
surrender guarantee, bounded rationality, fair contract analysis, secondary market 
Abstract: 	We study the effect of secondary markets on equity-linked
	life insurance contracts with surrender guarantees. The
	policyholders are assumed to be boundedly rational in
	giving up their contracts, and a proportion of
	policyholders will access the secondary markets instead of
	surrendering the contracts to the insurance company. We
	formulate the valuation problems from both the insurance
	company's and the policyholders' perspectives and
	characterize the contract values by deriving the
	respective pricing PDEs. Comparative statics are derived
	indicating the effect of the level of the policyholder's
	rationality and secondary market characteristics such as
	accessibility and competition on the contract values. The
	pricing PDEs are solved numerically via the Crank-Nicolson
	scheme to study the implication of the inclusion of a
	secondary market. We show that a secondary market
	generally increases the risk borne by the insurance
	company and the policyholders profit from the secondary
	market only when the secondary market is sufficiently
	competitive.  Furthermore, we derive the necessary
	condition for the existence of a fair contract in this
	context and study the effect of the secondary market on
	fair contract design.
Note: 
Length: 39
Creation-Date: 2011-09
Revision-Date: 
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse11_2011.pdf
File-Format: application/pdf
Handle: RePEc:bon:bonedp:bgse11_2011