Minimum return rate guarantees under default risk: optimal design of quantile guarantees

Antje Mahayni (), Oliver Lubos () and Sascha Offermann ()
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Antje Mahayni: University of Duisburg–Essen
Oliver Lubos: University of Duisburg–Essen
Sascha Offermann: University of Duisburg–Essen

Review of Managerial Science, 2021, vol. 15, issue 7, No 1, 1848 pages

Abstract: Abstract The paper analyzes the design of participating life insurance contracts with minimum return rate guarantees. Without default risk, the insured receives the maximum of a guaranteed rate and a participation in the investment returns. With default risk, the payoff is modified by a default put implying a compound option. We represent the yearly returns of the liabilities by a portfolio of plain vanilla options. In a Black and Scholes model, the optimal payoff constrained by a maximal shortfall probability can be stated in closed form. Due to the completeness of the market, it can be implemented for any equity to debt ratio.

Keywords: Guarantee scheme; Derivatives; Life insurance; Return rate guarantees; Default risk; Regulatory requirements; Utility to the insured (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11846-020-00410-3

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