The Impacts of Surrender Options on Reserve Durations

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.