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

No 2021047, LIDAM Reprints 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 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: 26
Date: 2021-10-28
Note: In: Scandinavian Actuarial Journal, 2021
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Persistent link: https://EconPapers.repec.org/RePEc:aiz:louvar:2021047

DOI: 10.1080/03461238.2021.1992001

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