IDEAS home Printed from https://ideas.repec.org/a/eee/ecofin/v54y2020ics1062940820301340.html
   My bibliography  Save this article

A sharing mechanism of investment outcome for interest-sensitive life insurance products

Author

Listed:
  • Lee, Hangsuck
  • Choi, Hyung-Suk
  • Ha, Hongjun

Abstract

As growing sales of insurance contracts with a saving feature, an issue of sharing investment outcome gets the attention of insurers and policyholders. This paper focuses on a systematic way of finding the sharing mechanism for an optimal contract design in such a way that a policyholder and an insurer maximize their expected utilities. We adopt the policyholder and the insurer as a principal and an agent, respectively, and regard a share of the investment performance as an incentive for the insurer to elicit efforts. As a result of this setting, the moral hazard issue generated from the insurer is unavoidable. For the purpose, the Holmström (1979)’s principal-agent model with limited observability of the insurer’s action plays a leading role in resolving a pie-cutting problem. Under our model assumption, the sharing mechanism states that a portion of the outcome belonging to the insurer is a nondecreasing function of the excess of the portfolio return over a benchmark return when the two parties are risk-averse. In particular, the sensitivity of the sharing portion has an S-shape curve which is consistent with the insurer’s risk propensity.

Suggested Citation

  • Lee, Hangsuck & Choi, Hyung-Suk & Ha, Hongjun, 2020. "A sharing mechanism of investment outcome for interest-sensitive life insurance products," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940820301340
    DOI: 10.1016/j.najef.2020.101237
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1062940820301340
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.najef.2020.101237?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
    2. Reint Gropp & Jukka Vesala, 2004. "Deposit Insurance, Moral Hazard and Market Monitoring," Review of Finance, European Finance Association, vol. 8(4), pages 571-602.
    3. Michael Sherris, 2006. "Solvency, Capital Allocation, and Fair Rate of Return in Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 71-96, March.
    4. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    5. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
    6. David P. Baron & David Besanko, 1987. "Monitoring, Moral Hazard, Asymmetric Information, and Risk Sharing in Procurement Contracting," RAND Journal of Economics, The RAND Corporation, vol. 18(4), pages 509-532, Winter.
    7. Robert G. Chambers, 1989. "Insurability and Moral Hazard in Agricultural Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(3), pages 604-616.
    8. Xuezheng Qin & Tianyi Lu, 2014. "Does Health Insurance Lead to Ex ante Moral Hazard? Evidence from China’s New Rural Cooperative Medical Scheme," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(4), pages 625-650, October.
    9. Wang, Ching-Ping & Huang, Hung-Hsi, 2016. "Optimal insurance contract under VaR and CVaR constraints," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 110-127.
    10. Alberto Floreani, 2013. "Risk Measures and Capital Requirements: A Critique of the Solvency II Approach," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 38(2), pages 189-212, April.
    11. Eric R. Ulm, 2017. "On the Interaction between Transfer Restrictions and Crediting Strategies in Guaranteed Funds," North American Actuarial Journal, Taylor & Francis Journals, vol. 21(3), pages 369-381, July.
    12. Xiaoming Liu, 2013. "Annuity Uncertainty with Stochastic Mortality and Interest Rates," North American Actuarial Journal, Taylor & Francis Journals, vol. 17(2), pages 136-152.
    13. Hato Schmeiser & Joël Wagner, 2015. "A Proposal on How the Regulator Should Set Minimum Interest Rate Guarantees in Participating Life Insurance Contracts," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 82(3), pages 659-686, September.
    14. Steven Shavell, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(4), pages 541-562.
    15. David T. Russell & Stephen G. Fier & James M. Carson & Randy E. Dumm, 2013. "An Empirical Analysis of Life Insurance Policy Surrender Activity," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 36(1), pages 35-57.
    16. Lee, Chien-Chiang & Huang, Wei-Ling & Yin, Chun-Hao, 2013. "The dynamic interactions among the stock, bond and insurance markets," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 28-52.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    2. Inés Macho-Stadler & David Pérez-Castrillo, 2018. "Moral hazard: Base models and two extensions," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume I, chapter 16, pages 453-485, Edward Elgar Publishing.
    3. Dionne, Georges & Vanasse, Charles, 1997. "Une évaluation empirique de la nouvelle tarification de l’assurance automobile (1992) au Québec," L'Actualité Economique, Société Canadienne de Science Economique, vol. 73(1), pages 47-80, mars-juin.
    4. Damien S Eldridge, 2007. "A Shirking Theory of Referrals," Working Papers 2007.05, School of Economics, La Trobe University.
    5. Renee B. Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2010. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 58-107, March.
    6. Thiele, Veikko, 2007. "Task-Specific Abilities in Multi-Task Agency Relations," MPRA Paper 2470, University Library of Munich, Germany.
    7. Cintya Lanchimba & Josef Windsperger & Muriel Fadairo, 2018. "Entrepreneurial orientation, risk and incentives: the case of franchising," Small Business Economics, Springer, vol. 50(1), pages 163-180, January.
    8. Sascha Tobias Wengerek & Benjamin Hippert & André Uhde, 2019. "Risk allocation through securitization - Evidence from non-performing loans," Working Papers Dissertations 58, Paderborn University, Faculty of Business Administration and Economics.
    9. Leon Chu & David Sappington, 2012. "Designing optimal gain sharing plans to promote energy conservation," Journal of Regulatory Economics, Springer, vol. 42(2), pages 115-134, October.
    10. Jia Xie, 2015. "Information, Risk Sharing and Incentives in Agency Problems," Staff Working Papers 15-7, Bank of Canada.
    11. Pierre Chaigneau, 2012. "On the Value of Improved Informativeness," Cahiers de recherche 1205, CIRPEE.
    12. Pierre Chaigneau & Alex Edmans & Daniel Gottlieb, 2014. "The Generalized Informativeness Principle," NBER Working Papers 20729, National Bureau of Economic Research, Inc.
    13. Garcia, René, 1986. "La théorie économique de l’information : exposé synthétique de la littérature," L'Actualité Economique, Société Canadienne de Science Economique, vol. 62(1), pages 88-109, mars.
    14. Otto Keck, 1987. "The Information Dilemma," Journal of Conflict Resolution, Peace Science Society (International), vol. 31(1), pages 139-163, March.
    15. Leon Zolotoy & Don O’Sullivan & Geoffrey P. Martin, 2022. "Behavioural Agency and Firm Productivity: Revisiting the Incentive Alignment Qualities of Stock Options," Journal of Management Studies, Wiley Blackwell, vol. 59(7), pages 1756-1787, November.
    16. Hao Zheng & Yi Yao & Yinglu Deng & Feng Gao, 2022. "Information asymmetry, ex ante moral hazard, and uninsurable risk in liability coverage: Evidence from China's automobile insurance market," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(1), pages 131-160, March.
    17. Li, Zhaolin, 2021. "Robust Moral Hazard with Distributional Ambiguity," Working Papers BAWP-2021-01, University of Sydney Business School, Discipline of Business Analytics.
    18. Dionne, Georges, 2006. "Book review of Foundations of Economic Analysis of Law, by Steven Shavell," Working Papers 06-9, HEC Montreal, Canada Research Chair in Risk Management.
    19. Lee, Hangsuck & Lee, Minha & Hong, Jimin, 2022. "Optimal insurance under moral hazard in loss reduction," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    20. Edmans, Alex & Gottlieb, Daniel & Chaigneau, Pierre, 2014. "The Informativeness Principle Under Limited Liability," CEPR Discussion Papers 10143, C.E.P.R. Discussion Papers.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940820301340. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620163 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.