Inter-cohort risk sharing with long-term guarantees: Evidence from German participating contracts

Johan Hombert, Axel Möhlmann and Matthias Weiß

No 10/2021, Discussion Papers from Deutsche Bundesbank

Abstract: Long-term minimum return guarantees sold by European life insurers increasingly become binding as interest rates decline. While participating contracts embedding these guarantees are designed to share market risk across investor cohorts when guarantees are not binding, we study how binding guarantees distort inter-cohort risk sharing. Using regulatory data on participating contracts in Germany, we find that binding guarantees reduced inter-cohort transfer by 10 basis points per year in the period 2000{2018. This is modest compared to the average transfer, which is in the range of 40{150 basis points. However, the effect is concentrated in the recent period of ultra-low interest rates and may grow larger if interest rates remain persistently low.

Keywords: Life insurers; Participating contracts; Long-term investment; Inter-cohort risk sharing; Minimum return guarantees (search for similar items in EconPapers)
JEL-codes: G22 G52 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-eur and nep-ias
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:102021

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