The Impact of Surplus Distribution on the Risk Exposure of With Profit Life Insurance Policies Including Interest Rate Guarantees

Alexander Kling, Andreas Richter and Jochen Ruß

Journal of Risk & Insurance, 2007, vol. 74, issue 3, 571-589

Abstract: This article analyzes the numerical impact of different surplus distribution mechanisms on the risk exposure of a life insurance company selling with profit life insurance policies with a cliquet‐style interest rate guarantee. Three representative companies are considered, each using a different type of surplus distribution: a mechanism, where the guaranteed interest rate also applies to surplus that has been credited in the past, a slightly less restrictive type in which a guaranteed rate of interest of 0 percent applies to past surplus, and a third mechanism that allows for the company to use former surplus in order to compensate for underperformance in “bad” years. Although at the outset all contracts offer the same guaranteed benefit at maturity, a distribution mechanism of the third type yields preferable results with respect to the considered risk measure. In particular, throughout the analysis, our representative company 3 faces ceteris paribus a significantly lower shortfall risk than the other two companies. Offering “strong” guarantees puts companies at a significant competitive disadvantage relative to insurers providing only the third type of surplus distribution mechanism.

Date: 2007
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jrinsu:v:74:y:2007:i:3:p:571-589

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