The Impact of the Secondary Market on Life Insurers' Surrender Profits

Life insurers often claim that the life settlement industry reduces theirsurrender profits and leads to an adverse shift in their portfolio of insuredrisks, i.e., bad risks remain in the portfolio instead of surrendering.In this paper, we aim to quantify the effect of altered surrenderbehavior––subject to the health status of an insured––in a portfolio oflife insurance contracts on the surrender profits of primary insurers.Our model includes mortality heterogeneity by applying a stochasticfrailty factor to a mortality table. In the course of our investigation, weadditionally analyze the impact of the premium payment method bycomparing results for annual and single premium payments.