Modeling lapse rates with economic variables: The vector autoregressive model approach
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Date
April, 2016
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Abstract
Life insurance contracts are accompanied by risks. This study focuses on the risk
involving termination of life policies by the policyholders. This study seeks to
identify the main determinants of lapse rates in the Ghanaian life insurance industry.
The data available span from 2006 to 2014 and were recorded on monthly
basis. Literature research on predictive modeling of lapse rates in the insurance
industry led to the choice for predicting with a VAR Model. A total of ve (5)
variables were analyzed on their relationship with the average lapse rate. Of
these variables in
ation, stock market return and interest rate proved valuable
for modeling. The vector auto-regression (VAR) model was used to capture the
evolution and the interdependencies between the variables. All the variables in
the VAR were treated symmetrically by including for each variable an equation
explaining its evolution based on its own lags and the lags of all the other variables
in the model. The main limitation of this research was the small amount of
data and their level of detail. Since the results of this research are promising it is
recommended to extend the research to other parts of the country. To increase
the statistical strength and accuracy of the inferences that can be made it is also
recommended to examine the lapse rates at a policyholder level.
Description
A thesis submitted to The Department of Mathematics, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the award of MSc. Actuarial Science,