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A Proposal on How the Regulator Should Set Minimum Interest Rate Guarantees in Participating Life Insurance Contracts

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abstract We consider a contingent claim model framework for participating life insurance contracts and assume a competitive market with minimum solvency requirements as provided by Solvency II. In a first step, the implications of the regulator's imposing a particular interest rate guarantee on the insurer's asset allocation are analyzed in a reference situation. We study the sensitivity of the interaction between the interest rate guarantee and the asset allocation when the risk-free interest rate changes. Particular attention is paid to the current market situation where the guaranteed interest rate is very close to the risk-free interest rate. In a second step, we assess at what level the interest rate guarantee should be set by the regulator in order to maximize policyholders' utility. We show that the results yielded by the proposed concept to derive an optimal value for the interest rate guarantee are very stable for various model parameters.
   
type journal paper
   
keywords participating life insurance · interest rate guarantee · solvency regulation · risk-neutral valuation · utility measure
   
language English
kind of paper journal article
date of appearance 20-2-2013
journal The Journal of Risk and Insurance
publisher Wiley
number of issue 0
page(s) forthcoming
review double-blind review
   
profile area SoM - Responsible Corporate Competitiveness (RoCC)
citation Schmeiser, H., & Wagner, J. (2013). A Proposal on How the Regulator Should Set Minimum Interest Rate Guarantees in Participating Life Insurance Contracts. The Journal of Risk and Insurance(0), forthcoming.