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

Author

Listed:
  • Hanna, Vanessa

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

  • Hieber, Peter

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

  • 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 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 Reprints ISBA 2021047, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvar:2021047
    DOI: https://doi.org/10.1080/03461238.2021.1992001
    Note: In: Scandinavian Actuarial Journal, 2021
    as

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