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Minimum Rate of Return Guarantees: The Danish Case

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  • Mette Hansen
  • Kristian Miltersen

Abstract

We analyze minimum rate of return guarantees for life-insurance (investment) contracts and pension plans with a smooth surplus distribution mechanism. We specifically model the smoothing mechanism used by most Danish life-insurance companies and pension funds. The annual distribution of bonus will be based on this smoothing mechanism after taking the minimum rate of return guarantee into account. In addition, based on the contribution method the customer will receive a final (non-negative) undistributed surplus when the contract matures. We consider two different methods that the company can use to collect payment for issuing these minimum rate of return guarantee contracts: the direct method where the company gets a fixed (percentage) fee of the customer's savings each year, e.g. 0.5% in Denmark, and the indirect method where the company gets a share of the distributed surplus. In both cases we analyze how to set the terms of the contract in order to have a fair contract between an individual customer and the company. Having analyzed the one-customer case, we turn to analyzing the case with two customers. We consider the consequences of pooling the undistributed surplus over two inhomogeneous customers. This implies setting up different mechanisms for distributing final bonus (undistributed surplus) between the customers.

Suggested Citation

  • Mette Hansen & Kristian Miltersen, 2002. "Minimum Rate of Return Guarantees: The Danish Case," Scandinavian Actuarial Journal, Taylor & Francis Journals, vol. 2002(4), pages 280-318.
    • Handle: RePEc:taf:sactxx:v:2002:y:2002:i:4:p:280-318
    DOI: 10.1080/03461230110106282
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    Cited by:

    1. Daliana Luca & Hato Schmeiser & Florian Schreiber, 2023. "Investment guarantees in financial products: an analysis of consumer preferences," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 48(4), pages 906-940, October.

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