Aggregate Lapsation Risk (with Ralph Koijen and Stijn Van Nieuwerburgh)

Journal of Financial Economics (2024)

We study aggregate lapsation risk in the life insurance sector. We construct two lapsation risk factors that explain a large fraction of the common variation in lapse rates of the 30 largest life insurance companies. The first is a cyclical factor that is positively correlated with credit spreads and unemployment, while the second factor is a trend factor that correlates with the level of interest rates. Using a novel policy-level database from a large life insurer, we examine the heterogeneity in risk factor exposures based on policy and policyholder characteristics. Young policyholders with higher health risk in low-income areas are more likely to lapse their policies during economic downturns. We explore the implications for hedging and valuation of life insurance contracts. Ignoring aggregate lapsation risk results in mispricing of life insurance policies. The calibrated model points to overpricing on average. In the cross-section, young, low-income, and high-health risk households face higher effective mark-ups than the old, high-income, and healthy.

The Financial Benefits of Health Engagement Programs to Life Insurers

Using a proprietary big database of health and mortality information from a large U.S. life insurer, I measure the potential financial benefits that will accrue to the insurer if it can improve the health status of the existing policyholders by running health engagement programs. The cost of changing the health behaviors is measured from a rational addiction model, which incorporates the insights from health economics and medical research. The estimated net benefit available to the life insurer from the smoking cessation program is USD 87 million and the aggregate benefit from including other chronic conditions is USD 872 million.

Work in Progress

The Macroeconomics of Medical Innovations (with Ralph Koijen and Stijn Van Nieuwerburgh)

Policy Incentives and Innovations: Evidence from the Orphan Drug Act