Mixed Participating and Unit-linked Life Insurance Contracts: Design, Pricing and Optimal Strategy
Mixed Participating and Unit-linked Life Insurance Contracts: Design, Pricing and Optimal Strategy
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uploaded August 10, 2021
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Speakers:Vanessa Hanna
Description:
In many countries, the decline in interest rates has reduced the interest in traditional participating life insurance contracts with investment guarantees and has led to a shift to unit-linked policies without guarantees. We design a novel mixed insurance contract splitting premium payments between a participating and a unit-linked fund. An additional guarantee fee is applied on the unit linked return in order to increase the investment guarantee of the participating fund. In a utility based framework, using power utility and prospect theory as preference functions, we show that the mixed product is usually perceived more attractive than a full investment in either the unit-linked or the participating contract. The guarantee fee is beneficial for conservative investors interested in a stronger protection against losses. This is also interesting from a marketing perspective: By the increase of the guarantee in the participating product, zero or negative guaranteed rates can be avoided.
Tags:guaranteespricingproduct designinvestmentlife insurance contracts
Categories:LIFE