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On the optimal design of insurance contracts with guarantees

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  • Branger, Nicole
  • Mahayni, Antje
  • Schneider, Judith C.
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    Abstract

    The paper analyzes insurance contracts where the benefits of the insured depend on the performance of an investment strategy and which guarantee a certain interest rate on the contributions made by the insured. The insured has to decide simultaneously on the investment strategy and the guarantee scheme. For a CRRA insured and in a BS economy, the optimal combination is given by a constant mix strategy and the contribution guarantee scheme. In case the insured has a subsistence level, the CPPI strategy turns out to be optimal for arbitrary schemes. We illustrate our results by numerical examples and analyze the utility losses of a CRRA insured due to the use of a suboptimal combination of investment strategy and guarantee scheme.

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    Bibliographic Info

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 46 (2010)
    Issue (Month): 3 (June)
    Pages: 485-492

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    Handle: RePEc:eee:insuma:v:46:y:2010:i:3:p:485-492

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    Web page: http://www.elsevier.com/locate/inca/505554

    Related research

    Keywords: Interest rate guarantee Optimal portfolio choice Utility loss Guarantee scheme CPPI;

    References

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    Cited by:
    1. Mahayni, Antje & Schneider, Judith C., 2012. "Variable annuities and the option to seek risk: Why should you diversify?," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2417-2428.

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