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A sharing mechanism of investment outcome for interest-sensitive life insurance products

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  • Lee, Hangsuck
  • Choi, Hyung-Suk
  • Ha, Hongjun

Abstract

As growing sales of insurance contracts with a saving feature, an issue of sharing investment outcome gets the attention of insurers and policyholders. This paper focuses on a systematic way of finding the sharing mechanism for an optimal contract design in such a way that a policyholder and an insurer maximize their expected utilities. We adopt the policyholder and the insurer as a principal and an agent, respectively, and regard a share of the investment performance as an incentive for the insurer to elicit efforts. As a result of this setting, the moral hazard issue generated from the insurer is unavoidable. For the purpose, the Holmström (1979)’s principal-agent model with limited observability of the insurer’s action plays a leading role in resolving a pie-cutting problem. Under our model assumption, the sharing mechanism states that a portion of the outcome belonging to the insurer is a nondecreasing function of the excess of the portfolio return over a benchmark return when the two parties are risk-averse. In particular, the sensitivity of the sharing portion has an S-shape curve which is consistent with the insurer’s risk propensity.

Suggested Citation

  • Lee, Hangsuck & Choi, Hyung-Suk & Ha, Hongjun, 2020. "A sharing mechanism of investment outcome for interest-sensitive life insurance products," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940820301340
    DOI: 10.1016/j.najef.2020.101237
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    References listed on IDEAS

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    Cited by:

    1. Lee, Hangsuck & Ha, Hongjun & Lee, Minha, 2024. "A sharing rule for multi-period interest-sensitive insurance contracts," The North American Journal of Economics and Finance, Elsevier, vol. 71(C).

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