Mixed participating and unit-linked life insurance contracts: design, pricing and optimal strategy

Vanessa Hanna, Peter Hieber and Pierre Devolder
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Vanessa Hanna: Université catholique de Louvain, LIDAM/ISBA, Belgium
Pierre Devolder: Université catholique de Louvain, LIDAM/ISBA, Belgium

No 2021010, LIDAM Discussion Papers ISBA from Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA)

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 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.

Keywords: Life and pension insurance; Participating contract; Unit-linked contract; Investment guarantee; Mixed insurance contracts; Expected utility; Cumulative prospect theory (search for similar items in EconPapers)
Pages: 29
Date: 2021-02-23
New Economics Papers: this item is included in nep-age, nep-ias and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:aiz:louvad:2021010

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