Abstract
Journal of Actuarial Practice
Volume 11, 2004
The Actuarial Value of Life
Insurance Backdating
James M. Carson and Krzysztof M. Ostaszewski
Abstract
Backdating is a common (and legal) practice in the U.S.
whereby a life insurance contract bears a policy date that is prior to the
actual application date. This practice often results in the opportunity for
some insureds to reduce the annual premium paid. Using
cash flow projections and U.S.
mortality, lapse, and interest rate data, we provide a model of the actuarial
value of term life insurance backdating. Results indicate that the benefits to
the applicant of backdating a term life insurance policy increase as the
applicant age (and hence premium) increases. Increasing mortality, lapse, and
interest rates, as
well as increasing the length of the backdated period decreases the potential benefits of
backdating. Finally, backdating appears to serve as a substitute for a finer partitioned
pricing structure in the life insurance industry, as a risk-hedging mechanism
for insurers, and as a risk-arbitrage tool for consumers.
Key words and phrases: insurance pricing, risk arbitrage, risk
hedging, phantom surrender charge, incentive compatible contracting
Corresponding Author:
James M. Carson
College
of Business
Florida
State University
Tallahassee,
FL 32306-1110
E-mail: jcarson@cob.fsu.edu
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