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Minimum return rate guarantees under default risk: optimal design of quantile guarantees

Author

Listed:
  • Antje Mahayni

    (University of Duisburg–Essen)

  • Oliver Lubos

    (University of Duisburg–Essen)

  • Sascha Offermann

    (University of Duisburg–Essen)

Abstract

The paper analyzes the design of participating life insurance contracts with minimum return rate guarantees. Without default risk, the insured receives the maximum of a guaranteed rate and a participation in the investment returns. With default risk, the payoff is modified by a default put implying a compound option. We represent the yearly returns of the liabilities by a portfolio of plain vanilla options. In a Black and Scholes model, the optimal payoff constrained by a maximal shortfall probability can be stated in closed form. Due to the completeness of the market, it can be implemented for any equity to debt ratio.

Suggested Citation

  • Antje Mahayni & Oliver Lubos & Sascha Offermann, 2021. "Minimum return rate guarantees under default risk: optimal design of quantile guarantees," Review of Managerial Science, Springer, vol. 15(7), pages 1821-1848, October.
    • Handle: RePEc:spr:rvmgts:v:15:y:2021:i:7:d:10.1007_s11846-020-00410-3
    DOI: 10.1007/s11846-020-00410-3
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    References listed on IDEAS

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    More about this item

    Keywords

    Guarantee scheme; Derivatives; Life insurance; Return rate guarantees; Default risk; Regulatory requirements; Utility to the insured;
    All these keywords.

    JEL classification:

    • G - Financial Economics
    • G - Financial Economics

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