Investment Strategies with Illiquid Life Insurance Investment and Intergenerational Return Smoothing

31 Pages Posted: 7 Mar 2016

See all articles by Ruth Kümmerle

Ruth Kümmerle

WHU - Otto Beisheim School of Management

Markus Rudolf

WHU Otto Beisheim Graduate School of Management

Date Written: March 4, 2016

Abstract

With-profit life insurance contracts are designed with a return smoothing collective savings component sharing the investment risks amongst different generations of policyholders. We analyze the resulting implications from the point of view of a multi-asset mean-variance investor by evaluating different kinds of investment strategies. As a result, we report a discount in the certainty equivalent rate of return for giving up the intergenerational risk transfer which ranges between 0.74 and 62 basis points annually. We further show, that its magnitude is increasing in risk aversion, decreasing with the investment horizon and higher for a liquid compared to an illiquid life insurance investment.

Keywords: illiquidity, life insurance, portfolio optimization, return smoothing

JEL Classification: D14, G11, G22

Suggested Citation

Kümmerle, Ruth and Rudolf, Markus, Investment Strategies with Illiquid Life Insurance Investment and Intergenerational Return Smoothing (March 4, 2016). Available at SSRN: https://ssrn.com/abstract=2742297 or http://dx.doi.org/10.2139/ssrn.2742297

Ruth Kümmerle (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Markus Rudolf

WHU Otto Beisheim Graduate School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49-(0)261-6509-420 (Phone)

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