How to Derive Optimal Guarantee Levels in Participating Life Insurance Contracts
Journal
Journal of Risk Finance
Series
Working Papers on Risk Management and Insurance
ISSN
1526-5943
Type
journal article
Date Issued
2019-12-04
Author(s)
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.
Language
English
HSG Classification
contribution to scientific community
Refereed
No
Publisher
Emerald Group Publishing Limited
Volume
20
Number
5
Start page
445
End page
469
Subject(s)
Division(s)
Eprints ID
243054