How to Derive Optimal Guarantee Levels in Participating Life Insurance Contracts

Item Type Journal paper
Abstract Participating life insurance contracts are common products in Europe. Their savings component typically exhibits an interest rate guarantee in combination with a surplus participation mechanism. Together, these two features constitute an embedded option. The purpose of this article is to show how an insurance company can maximize policyholder utility by setting the level of the interest rate guarantee in line with his preferences. We develop a general model of life insurance, taking stochastic interest rates, early default and regular premium payments into account. Furthermore, we assume that equity holders receive risk adequate returns on their initial equity contribution. Our findings show that the optimal level for the interest rate guarantee is far below the maximum value typically set by the supervisory authorities and insurance companies.
Authors Braun, Alexander; Fischer, Marius & Schmeiser, Hato
Journal or Publication Title Journal of Risk Finance
Language English
Subjects business studies
HSG Classification contribution to scientific community
Refereed No
Date 4 December 2019
Publisher Emerald Group Publishing Limited
Series Name Working Papers on Risk Management and Insurance
Volume 20
Number 5
Page Range 445-469
ISSN 1526-5943
Publisher DOI
Official URL
Depositing User Prof. Dr. Alexander Braun
Date Deposited 10 Aug 2015 11:50
Last Modified 20 Jul 2022 17:25


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Braun, Alexander; Fischer, Marius & Schmeiser, Hato (2019) How to Derive Optimal Guarantee Levels in Participating Life Insurance Contracts. Journal of Risk Finance, 20 (5). 445-469. ISSN 1526-5943

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