Annuity Lapse Rate Modeling: Tobit or Not Tobit?

We devise an approach, using tobit models for modeling annuity lapse rates. The approach is based on data provided by the Society of Actuaries’ Risk Management Task Force. Kim [2005a] models annuity lapse rates using a logit model and the same US data (he also used Korean data separately). We find that the tobit model is a more than suitable approach for all levels of the explanatory variables including interest rates, unemployment rates, and GDP growth rates. Specifically, policyholder behavior in the tail of the distribution of lapse rates is explained as well as it is in the normal range of lapse rates.

Publication Information
Article Title: Annuity Lapse Rate Modeling: Tobit or Not Tobit?
Journal: Society of Actuaries (Oct, 2006)
Author(s): Cox, Samuel H.;  Lin, Yijia
Researcher Information
Lin, Yijia
Lin, Yijia
N. Z. Snell Life Insurance Professor
HLH 425 V
P.O. Box 880490
University of Nebraska-Lincoln
Lincoln, NE 68588-0490, USA
Phone: (402) 472-0093
Fax: (402) 472-5140