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A sharing rule for multi-period interest-sensitive insurance contracts

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  • Lee, Hangsuck
  • Ha, Hongjun
  • Lee, Minha

Abstract

As sales of interest-sensitive products grow in insurance markets, determining a sharing rule for allocating investment returns between a policyholder and an insurer is crucial. This paper discusses a theoretical sharing rule for a multi-period contract, reflecting that the insurer’s investment efforts are unobservable and that a stream of information inferring the quality of the efforts exists. Our sharing rule is developed by selecting multi-period excess returns as available information and maximizing the expected utility of the policyholder. The empirical analysis shows that the effect of multi-period excess returns on insurers’ sharing patterns is consistent with the theoretical findings.

Suggested Citation

  • 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).
    • Handle: RePEc:eee:ecofin:v:71:y:2024:i:c:s1062940824000366
    DOI: 10.1016/j.najef.2024.102111
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    More about this item

    Keywords

    Interest-sensitive insurance; Sharing rule; Principal–agent problem;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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