Estimating the duration of the life insurance policy is the first step in measuring the interest rate risk for life insurance companies. Life insurance policy's duration is quite different from bond's due to the difference in the cash flow pattern. Life insurance policies generate not only cash outflows as payments to policyholders from insurers but also cash inflows as premiums from policyholders to insurers. The net cash flow may have sign changes. The duration of the life insurance policy therefore could be negative or longer than the maturity of the policy. It could even be huge if the reserve is close to zero. Moreover, the mortality rate does not have a significant impact on policy duration; early surrender would reduce policy duration in general; and leveling commission rate makes positive duration smaller.
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