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Fair Valuation and Risk Assessment of Dynamic Hybrid Products in Life Insurance: A Portfolio Consideration*

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  • Alexander Bohnert

    (Department of Insurance Economics and Risk Management, Friedrich-Alexander-University (FAU) of Erlangen-Nürnberg, Lange Gasse 20, Nuremberg 90403, Germany. E-mails: alexander.bohnert@fau.de; nadine.gatzert@fau.de)

  • Nadine Gatzert

    (Department of Insurance Economics and Risk Management, Friedrich-Alexander-University (FAU) of Erlangen-Nürnberg, Lange Gasse 20, Nuremberg 90403, Germany. E-mails: alexander.bohnert@fau.de; nadine.gatzert@fau.de)

Abstract

Dynamic hybrid products are innovative life insurance products particularly offered in the German market and intended to meet new consumer needs regarding stability and upside potential. These products are characterised by a periodical rebalancing process between the policy reserves (i.e. the premium reserve stock), a guarantee fund and an equity fund. The policy reserve thereby corresponds to the one also valid for traditional participating life insurance products. Hence, funds of dynamic hybrids that are allocated to the policy reserves in times of adverse capital market environments earn the same policy interest rate determined for the participating life insurance policyholders and, hence, at least a guaranteed interest rate. In this paper, we study the fair valuation and risk situation of an insurer offering both dynamic hybrid and traditional participating life insurance contracts. The results reveal considerable interaction effects between the two contract types within the portfolio that strongly depend on the portfolio composition, thereby emphasising merits as well as risks associated with offering dynamic hybrids.

Suggested Citation

  • Alexander Bohnert & Nadine Gatzert, 2014. "Fair Valuation and Risk Assessment of Dynamic Hybrid Products in Life Insurance: A Portfolio Consideration*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(1), pages 148-172, January.
    • Handle: RePEc:pal:gpprii:v:39:y:2014:i:1:p:148-172
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    Citations

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    Cited by:

    1. Christian Eckert, 2019. "Dealing with Low Interest Rates in Life Insurance: An Analysis of Additional Reserves in the German Life Insurance Industry," JRFM, MDPI, vol. 12(3), pages 1-20, July.
    2. Hanna, Vanessa & Hieber, Peter & Devolder, Pierre, 2021. "Mixed participating and unit-linked life insurance contracts: design, pricing and optimal strategy," LIDAM Discussion Papers ISBA 2021010, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    3. Bohnert, Alexander & Born, Patricia & Gatzert, Nadine, 2014. "Dynamic hybrid products in life insurance: Assessing the policyholders’ viewpoint," Insurance: Mathematics and Economics, Elsevier, vol. 59(C), pages 87-99.
    4. Hambardzumyan, Hayk & Korn, Ralf, 2019. "Dynamic hybrid products with guarantees—An optimal portfolio framework," Insurance: Mathematics and Economics, Elsevier, vol. 84(C), pages 54-66.
    5. Nikolaj Moretti & Johannes Bartels, 2021. "Interaction effects between dynamic hybrid products and traditional deferred annuities in the German life insurance market," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 35(2), pages 193-224, June.

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