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Pricing And Assessing Unit-Linked Insurance Contracts With Investment Guarantees

Author

Listed:
  • Ciumas Cristina

    (Department of Finance, Faculty of Economics and Business Administration, Babes-Bolyai University)

  • Chis Diana-Maria

    (Department of Finance, Faculty of Economics and Business Administration, Babes-Bolyai University)

Abstract

One of the most interesting life insurance products to have emerged in recent years in the Romanian insurance market has been the unit-linked contract. Unit-linked insurance products are life insurance policies with investment component. A unit-linked life insurance has two important components: protection and investment. The protection component refers to the insured sum in case of the occurrence of insured risks and the investment component refers to the policyholders' account that represents the present value of the units from the chosen investment funds. Due to the financial instability caused by the Global Crisis and the amplification of market competitiveness, insurers from international markets have started to incorporate guarantees in unit-linked products. So a unit- linked life insurance policy with an asset value guarantee is an insurance policy whose benefit payable on death or at maturity consists of the greater of some guaranteed amount and the value of the units from the investment funds. One of the most challenging issues concerns the pricing of minimum death benefit and maturity benefit guarantees and the establishing of proper reserves for these guarantees. Insurers granting guarantees of this type must estimate the cost and include the cost in the premium. An important component of the activity carried out by the insurance companies is the investment of the premiums paid by policyholders in various types of assets, in order to obtain higher yields than those guaranteed by the insurance contracts, while providing the necessary liquidity for the payment of insurance claims in case of occurrence of the assumed risks. So the guaranteed benefits can be broadly matched or immunized with various types of financial assets, especially with fixed-interest instruments. According to Romanian legislation which regulates the unit-linked life insurance market, unit-linked life insurance contracts pass most of the investment risk to the policyholder and involve no investment risk for the insurer. Although the Romanian legislation authorizes the Romanian insurers to offer unit-linked contracts without investment guarantees, this research provides a proposal of a theoretical and empirical basis for pricing the unit-linked insurance contracts with incorporated investment guarantees.

Suggested Citation

  • Ciumas Cristina & Chis Diana-Maria, 2014. "Pricing And Assessing Unit-Linked Insurance Contracts With Investment Guarantees," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 864-873, July.
    • Handle: RePEc:ora:journl:v:1:y:2014:i:1:p:864-873
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    File URL: http://anale.steconomiceuoradea.ro/volume/2014/n1/095.pdf
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    References listed on IDEAS

    as
    1. Brennan, Michael J & Schwartz, Eduardo S, 1979. "Alternative Investment Strategies for the Issuers of Equity Linked Life Insurance Policies with an Asset Value Guarantee," The Journal of Business, University of Chicago Press, vol. 52(1), pages 63-93, January.
    2. Marius Gavriletea, 2009. "The Future of Investment Done by Unit Linked Insurance in Romania," Interdisciplinary Management Research, Josip Juraj Strossmayer University of Osijek, Faculty of Economics, Croatia, vol. 5, pages 819-830.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Iryna Honcharenko & Olena Berezina, 2017. "Challenges And Strategic Priorities For The Development Of Investment Insurance In Ukraine," Baltic Journal of Economic Studies, Publishing house "Baltija Publishing", vol. 3(5).

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    More about this item

    Keywords

    Unit-linked products; Investment guarantees; Black-Scholes Model; Call options; Treasury bills;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C87 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Econometric Software

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