An Empirical Analysis of Life Insurance Policy Surrender Activity

We analyze life insurance policy surrender activity to determine whether surrender is a function of certain macroeconomic variables and, therefore, highly correlated across policies. Results support the Emergency Fund Hypothesis and the Interest Rate Hypothesis. In addition, we provide evidence that surrenders are significantly related to policy replacement activity, as in Outreville (1990), which we refer to as the Policy Replacement Hypothesis. The significant relationship between policy surrender and macroeconomic factors strongly supports insurer efforts to understand and actively manage disintermediation risk via insurance contract features and investment policy.