Tag: Stijn Van Nieuwerburgh

Aggregate Lapsation Risk

Mary Pat Campbell

Link: https://www.nber.org/papers/w30187

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Abstract:

We study aggregate lapsation risk in the life insurance sector. We construct two lapsation risk factors that explain a large fraction of the common variation in lapse rates of the 30 largest life insurance companies. The first is a cyclical factor that is positively correlated with credit spreads and unemployment, while the second factor is a trend factor that correlates with the level of interest rates. Using a novel policy-level database from a large life insurer, we examine the heterogeneity in risk factor exposures based on policy and policyholder characteristics. Young policyholders with higher health risk in low-income areas are more likely to lapse their policies during economic downturns. We explore the implications for hedging and valuation of life insurance contracts. Ignoring aggregate lapsation risk results in mispricing of life insurance policies. The calibrated model points to overpricing on average. In the cross-section, young, low-income, and high-health risk households face higher effective mark-ups than the old, high-income, and healthy.

Author(s): Ralph S. J. Koijen, Hae Kang Lee & Stijn Van Nieuwerburgh

WORKING PAPER 30187
DOI 10.3386/w30187

Publication Date: July 2022

Publication Site: NBER

Measuring U.S. Fiscal Capacity using Discounted Cash Flow Analysis

Mary Pat Campbell

Link: https://www.nber.org/papers/w29902

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PDF link: https://www.nber.org/system/files/working_papers/w29902/w29902.pdf

Abstract:

We use discounted cash flow analysis to measure a country’s fiscal capacity. Crucially, the discount rate applied to projected cash flows includes a GDP risk premium. We apply our valuation method to the CBO’s projections for the U.S. federal government’s deficit between 2022 and 2051 and debt in 2051. In spite of low rates, our current measure of U.S. fiscal capacity is lower than the debt/GDP ratio. Because of the backloading of projected surpluses, the duration of the surplus claim far exceeds the duration of the outstanding Treasury portfolio. This duration mismatch exposes the government to the risk of rising rates, which would trigger the need for higher tax revenue or lower spending. Reducing this risk by front-loading the surpluses also requires major fiscal adjustment.

Author(s): Zhengyang Jiang, Hanno Lustig, Stijn Van Nieuwerburgh & Mindy Z. Xiaolan

Publication Date: April 2022

Publication Site: NBER

DOI 10.3386/w29902

WORKING PAPER 29902