The Effect of Risk Aversion on Lapsation in Iran Life Insurance Market

Authors

1 Associate Professor, Allameh Tabataba'i University

2 MS in Actuarial science, Allameh Tabataba'i University

Abstract


Adverse selection is a real obstacle in the life insurance industry describing a situation in which information asymmetry leads riskier policyholders to purchase more insurance coverage. Such kind of adverse selection is static adverse selection in the time of purchasing policy. Asymmetric information results in another type of adverse selection called dynamic adverse selection. Dynamic adverse selection occurs when individuals with high level of   risk aversion (low-risk individuals) lapse a policy during the period of contract. Inversely, dynamic advantageous selection occurs when individuals with low level of   risk aversion (high-risk individuals) lapse their contracts when policy is effective.
In this article, we investigate the effects of Risk Aversion on the lapsation of life insurance policies in Iranian Life Insurance Market. A Binary logistic analysis is used to examine the effects of risk aversion on lapsation of life insurance policies.
Results show that the lapsation of life insurance policies has a negative correlation with the risk aversion level of policyholders. Age, gender and marital status as risk aversion proxies affect significantly the lapsation of life insurance policies. Since individuals with low level of risk aversion (high-risk individuals) lapse their contracts more than individuals with high level of risk aversion (low-risk individuals), dynamic Advantageous Selection is evident in Iranian life Insurance Market.

Keywords