Mixed participating and unit-linked life insurance contracts: design, pricing and optimal strategy
(2022) Scandinavian Actuarial Journal — Vol. 2022, n° 5, p. 421-446 (2022)
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- Abstract
- 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 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.
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Citations
Hanna, V., Hieber, P., & Devolder, P. (2022). Mixed participating and unit-linked life insurance contracts: design, pricing and optimal strategy. Scandinavian Actuarial Journal, 2022(5), 421-446. https://doi.org/10.1080/03461238.2021.1992001 (Original work published 2022)