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On the Valuation of Investment Guarantees in Unit-Linked Life Insurance : A Customer Perspective

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
   
type journal paper
   
keywords
   
language English
kind of paper journal article
date of appearance 15-1-2011
journal Geneva Papers on Risk and Insurance
publisher Palgrave MacMillan (Basingstoke)
ISSN 1018-5895
ISSN (online) 1468-0440
volume of journal 36
number of issue 1
page(s) 3-29
review double-blind review
   
citation Schmeiser, H., Huber, C., & Gatzert, N. (2011). On the Valuation of Investment Guarantees in Unit-Linked Life Insurance: A Customer Perspective. Geneva Papers on Risk and Insurance, 36(1), 3-29.