Life insurance surrender and liquidity risks

Surrender options in endowment life insurance contracts can result in a surrender risk for the insurer. This risk is closely related to investment and liquidity risks. Consequently, the surrender risk is underestimated if it is assessed without consideration of all major risk sources. Using different risk measures, this paper shows that the surrender risk increases if the liquidity constraint is considered. Additionally, in an extreme event, mass surrender and a liquidity crisis can trigger each other. Therefore, the surrender risk could grow even faster. In this case, the solvency capital calculated within the Solvency II regime may not be enough to provide the intended protection. Furthermore, if policyholders surrender their contracts rationally, insurers face an even higher default threat.