International Comparison of Interest Rate Guarantees in Life Insurance Contracts

34 Pages Posted: 14 Dec 2007

See all articles by J David Cummins

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Kristian R. Miltersen

Copenhagen Business School

Svein-Arne Persson

Norwegian School of Economics (NHH)

Date Written: October 30, 2007

Abstract

Minimum interest rate guarantees are included in life insurance products in most countries, but the exact implementations of the guarantees vary significantly across countries. In this paper we develop models of interest rate guarantees in Denmark, Germany, Norway, the U.K., and the U.S. by constructing contracts designed to capture practices in each country. The European contracts include rather sophisticated investment surplus distribution mechanisms, whereas the U.S. contracts are simpler and do not involve an explicit bonus account. The models are compared empirically using simulation analysis. For low volatilities, the payoffs from the Danish, German and U.K. contracts are surprisingly similar to the payoff from the market index. However, for higher levels of volatility the contracts noticeably truncate the lower tail of the index return distribution. The U.S. and Norwegian contracts offer the lowest risk of all contracts but also have the lowest expected returns. Thus, investors in life insurance products encounter significantly different risk-return profiles depending on country of origin.

Keywords: life insurance, interest rate guarantees, universal life, bonus account, Sharpe ratios

JEL Classification: G21, G22, G13

Suggested Citation

Cummins, J. David and Miltersen, Kristian Risgaard and Persson, Svein-Arne, International Comparison of Interest Rate Guarantees in Life Insurance Contracts (October 30, 2007). Available at SSRN: https://ssrn.com/abstract=1071863 or http://dx.doi.org/10.2139/ssrn.1071863

J. David Cummins (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1801 Liacouras Walk.
Philadelphia, PA 19122
United States
215-204-8468 (Phone)
215-204-4712 (Fax)

Kristian Risgaard Miltersen

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Svein-Arne Persson

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway
47-55-95-90-00 (Phone)
47-55-95-96-47 (Fax)

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