Constrained non-concave utility maximization: An application to life insurance contracts with guarantees

An Chen, Peter Hieber and Thai Nguyen

European Journal of Operational Research, 2019, vol. 273, issue 3, 1119-1135

Abstract: We study a problem of non-concave utility maximization under a fair pricing constraint. The framework finds many applications in, for example, the optimal design of managerial compensation or equity-linked life insurance contracts. Deriving closed-form solutions, we observe that the fair pricing constraint will reduce the riskiness of the optimal strategies substantially. In an extensive numerical section, we analyze innovative retirement products that adapt the investment strategy of the premium pool according to the policyholder’s preferences, modeled as constant relative risk aversion (CRRA). Such products are a response to the loss of attractiveness of traditional life insurance contracts with guarantees that are negatively affected by increasing solvency requirements for return guarantees and a general decrease in interest rate levels. Taking into account that retirement products are usually tax-privileged, we find that fairly priced guarantee contracts that follow this optimal investment strategy lead to a higher expected utility level than asset investments.

Keywords: Optimal asset allocation; Insurance contract design; Managerial compensation; Power utility; Logarithmic utility, (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221718307483
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:273:y:2019:i:3:p:1119-1135

DOI: 10.1016/j.ejor.2018.09.002

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().