On the Optimal Design of Insurance Contracts with Guarantees
25 Pages Posted: 1 Jul 2010 Last revised: 4 Jul 2010
Date Written: June 30, 2010
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
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