The Effect of Secondary Markets on Equity‐Linked Life Insurance With Surrender Guarantees

TLDR

Equity‑linked life insurance products allow early surrender, and secondary markets for such policies affect both policyholders and insurers. Insurers raise premiums to offset higher surrender rates and the strategic surrender behavior of secondary‑market investors. Secondary markets create a value gap between insurers and policyholders, making them potentially unprofitable for primary policyholders, with outcomes contingent on contract demand and supply.

Abstract

Abstract Many equity‐linked life insurance products offer the possibility to surrender policies prematurely. Secondary markets for policies with surrender guarantees influence both policyholders and insurers. We show that secondary markets lead to a gap in policy value between insurer and policyholder. Insurers increase premiums to adjust for higher surrender rates of customers and optimized surrender behavior by investors acquiring the policies on secondary markets. Hence, the existence of secondary markets is not necessarily profitable for the primary policyholders. The result depends on the demand for and the supply of the contracts brought to the secondary markets.