The value of interest rate guarantees in participating life insurance contracts: Status quo and alternative product design

We compare cliquet-style interest rate guarantees used in German participating life insurance contracts across different economic environments. These guarantees are proportional to the average market interest rate at contract inception and typically set at 60% of the 10-year rolling average of government bond yields. Currently, however, in the face of prolonged low interest rates and stricter solvency regulation, the continued viability of this type of product is in question. A discussion of alternative guarantee designs is thus highly relevant. To this end, we perform a comparative analysis of contracts sold in different interest rate environments with regard to the guarantee value and show that the current practice of proportional guarantees leads to higher guarantee values the lower the market interest rate. We also observe an increased interest rate sensitivity. Additionally, alternative product designs that mitigate the interest rate dependency of the guarantee value are illustrated and assessed from the policyholder perspective.