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Funding Life Insurance Contracts with Guarantees: How Can We Optimally Respond to the Policyholder's Needs?

29 Pages Posted: 11 Aug 2017  

An Chen

University of Ulm

Peter Hieber

University of Ulm - Department of Mathematics and Economics

Thai Nguyen

University of Ulm - Institute of Insurance Science

Date Written: August 10, 2017

Abstract

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

Chen, An and Hieber, Peter and Nguyen, Thai, Funding Life Insurance Contracts with Guarantees: How Can We Optimally Respond to the Policyholder's Needs? (August 10, 2017). Available at SSRN: https://ssrn.com/abstract=3016267

An Chen

University of Ulm ( email )

Helmholzstrasse
Ulm, D-89081
Germany

HOME PAGE: http://www.uni-ulm.de/mawi/ivw/team

Peter Hieber (Contact Author)

University of Ulm - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

Thai Nguyen

University of Ulm - Institute of Insurance Science ( email )

Ulm, 89081
Germany

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