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Mixed participating and unit-linked life insurance contracts: design, pricing and optimal strategy

Author

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  • Hanna, Vanessa

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

  • Hieber, Peter
  • Devolder, Pierre

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

Abstract

In many countries, the decline in interest rates has reduced the interest in traditional participating life insurance contracts with investment guarantees and has led to a shift to unit-linked policies without guarantees. We design a novel mixed insurance contract splitting premium payments between a participating and a unit-linked fund. An additional guarantee fee is applied on the unit-linked return in order to increase the investment guarantee of the participating fund. In a utility-based framework, using power utility and prospect theory as preference functions, we show that the mixed product is usually perceived more attractive than a full investment in either the unit-linked or the participating contract. The guarantee fee is beneficial for conservative investors interested in a stronger protection against losses. This is also interesting from a marketing perspective: By the increase of the guarantee in the participating product, zero or negative guaranteed rates can be avoided.

Suggested Citation

  • 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).
    • Handle: RePEc:aiz:louvad:2021010
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Life and pension insurance ; Participating contract ; Unit-linked contract ; Investment guarantee ; Mixed insurance contracts ; Expected utility ; Cumulative prospect theory;
    All these keywords.

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