Modelling and Managing Policyholder Behavioural Risks

Timothy S Paris

The importance and visibility of policyholder behaviour risks exploded in the years following the financial crisis of 2008, particularly those embedded within the guarantees of non-traditional life insurance products. This was due to a combination of factors within the market for these products, as well as external forces.

While the roots for these products go back to the 1950s in the US, the dawning of the modern era was in the 1990s with the proliferation of multi-manager products distributed through independent advisers. Subsequently, sales and inforce volumes grew dramatically, with hundreds of billions in annual sales and approximately US$2 trillion inforce. The guarantee features fuelling these sales evolved from death benefit guarantees to a range of living benefit guarantees that are central to the products’ marketing appeal, and which are highly sensitive to policyholder behaviours such as surrenders, partial withdrawals and annuitisations, along with mortality and longevity. Remarkably, during this 20-year period the evolution of these innovative features has been quite rapid, even while the guarantee features themselves were typically of a much longer tenor