Mixed participating and unit-linked life insurance contracts: design, pricing and optimal strategy. Issue 5 (28th May 2022)

• Record Type: Journal Article
• Authors: Hanna, Vanessa; Hieber, Peter; Devolder, Pierre
• Is Part Of: Scandinavian actuarial journal. Volume 2022:Issue 5(2022)
• Page Start: 421
• Page End: 446
• Publication Date: 2022-05-28
• Subjects: Life and pension insurance -- participating contract -- unit-linked contract -- investment guarantee -- mixed insurance contracts -- expected utility -- cumulative prospect theory; Insurance, Life -- Mathematics -- Periodicals; Insurance -- Mathematics -- Periodicals; 368.01
• DOI: 10.1080/03461238.2021.1992001
• Languages: English
• ISSNs: 0346-1238

Abstract

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.