On the Optimal Design of Insurance Contracts with Guarantees

25 Pages Posted: 1 Jul 2010 Last revised: 4 Jul 2010

See all articles by Nicole Branger

Nicole Branger

University of Muenster - Finance Center Muenster

Antje Brigitte Mahayni

Mercator School of Management

Judith C. Schneider

University of Muenster - Finance Center Muenster

Date Written: June 30, 2010

Abstract

The paper analyzes insurance contracts where the benefits of the insured depend on the performance of an investment strategy and which guarantee a certain interest rate on the contributions made by the insured. The insured has to decide simultaneously on the investment strategy and the guarantee scheme. For a CRRA insured and in a BS economy, the optimal combination is given by a constant mix strategy and the contribution guarantee scheme. In case the insured has a subsistence level, the CPPI strategy turns out to be optimal for arbitrary schemes.

We illustrate our results by numerical examples and analyze the utility losses of a CRRA insured due to the use of a suboptimal combination of investment strategy and guarantee scheme.

Keywords: Interest Rate Guarantee, Optimal Portfolio Choice, Utility Loss, Guarantee Scheme, CPPI

JEL Classification: G11, G22

Suggested Citation

Branger, Nicole and Mahayni, Antje B. and Schneider, Judith C., On the Optimal Design of Insurance Contracts with Guarantees (June 30, 2010). Insurance: Mathematics and Economics, Vol. 4, 2010. Available at SSRN: https://ssrn.com/abstract=1632828

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Antje B. Mahayni

Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

Judith C. Schneider (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

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