Funding Life Insurance Contracts with Guarantees: How Can We Optimally Respond to the Policyholder's Needs?
32 Pages Posted: 11 Aug 2017 Last revised: 19 Oct 2017
Date Written: October 16, 2017
Due to the increasing solvency requirements for return guarantees and a general decrease in interest rate levels, the attractiveness of equity-linked life insurance contracts with guarantee has recently substantially decreased. To regain competitiveness for these products, insurance companies need to be more flexible in their contract design and think of tailor-made retirement products that still satisfy the policyholder's needs. One such possibility is to adapt the investment strategy of the premium pool according to the policyholder's preferences. In this article, we determine the investment strategy that maximizes the expected utility of the policyholder's insurance contract payoff. Taking into account that retirement products are usually tax-privileged, we find that fairly priced guarantee contracts that follow this optimal investment strategy lead to a higher expected utility than asset investments.
Keywords: optimal asset alllocation, insurance contract design, investment guarantee, utility maximization
JEL Classification: G11, G23
Suggested Citation: Suggested Citation