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On the Valuation of Investment Guarantees in Unit-Linked Life Insurance : A Customer Perspective
Journal
Geneva Papers on Risk and Insurance
ISSN
1018-5895
ISSN-Digital
1468-0440
Type
journal article
Date Issued
2011-01-15
Author(s)
Abstract
Interest rate guarantees in unit-linked life insurance products ensure that at contract maturity, at least a minimum guaranteed amount is paid, even if the mutual fund falls below the guaranteed level. Strongly depending on the riskiness of the underlying mutual fund, these guarantees can be of substantial value. However, while insurer pricing is based on the replication of cash flows, customers are more likely to base their decisions on individual preferences. The aim of this paper is to contrast reservation prices for guarantees in unit-linked life insurance policies based on customers subjective willingness to pay with a financial pricing approach, an investigation that has not been undertaken to date. To do so, we use an online questionnaire survey as well as calculate reservation prices using option pricing theory. Our findings reveal that even though the majority of the participants in the online questionnaire are employed in the field of insurance, subjective prices are difficult to derive and are significantly lower on average than the prices obtained using a financial pricing model. However, a considerable portion of participants is still willing to pay a substantially higher price
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Palgrave MacMillan
Publisher place
Basingstoke
Volume
36
Number
1
Start page
3
End page
29
Pages
27
Subject(s)
Division(s)
Eprints ID
69301