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A performance analysis of participating life insurance contracts

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  • Faust, Roger
  • Schmeiser, Hato
  • Zemp, Alexandra

Abstract

Participating life insurance contracts are one of the most important products in the European life insurance market. Even though these contract forms are very common, only very little research has been conducted in respect to their performance. Hence, we conduct a performance analysis to provide a decision support for policyholders. We decompose a participating life insurance contract in a term life insurance and a savings part and simulate the cash flow distribution of the latter. Simulation results are compared with cash flows resulting from two benchmarks investing in the same portfolio of assets but without investment guarantees and bonus distribution schemes, in order to measure the impact of these two product features. To provide a realistic picture within the two alternatives, we take transaction costs and wealth transfers between different groups of policyholders into account. We show that the payoff distribution strongly depends on the initial reserve situation and managerial discretion. Results indicate that policyholders will in general profit from a better payoff distribution of the participating life insurance compared to a mutual fund benchmark but not compared to an exchange-traded fund benchmark portfolio.

Suggested Citation

  • Faust, Roger & Schmeiser, Hato & Zemp, Alexandra, 2012. "A performance analysis of participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 51(1), pages 158-171.
    • Handle: RePEc:eee:insuma:v:51:y:2012:i:1:p:158-171
    DOI: 10.1016/j.insmatheco.2012.03.004
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    References listed on IDEAS

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    1. Gatzert, Nadine, 2008. "Asset management and surplus distribution strategies in life insurance: An examination with respect to risk pricing and risk measurement," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 839-849, April.
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    6. Kling, Alexander & Richter, Andreas & Ru[ss], Jochen, 2007. "The interaction of guarantees, surplus distribution, and asset allocation in with-profit life insurance policies," Insurance: Mathematics and Economics, Elsevier, vol. 40(1), pages 164-178, January.
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    Cited by:

    1. Guelman, Leo & Guillén, Montserrat & Pérez-Marín, Ana M., 2014. "A survey of personalized treatment models for pricing strategies in insurance," Insurance: Mathematics and Economics, Elsevier, vol. 58(C), pages 68-76.
    2. Alexander Bohnert, 2015. "The Impact of Guarantees on the Performance of Pension Saving Schemes: Insights from the Literature," Risks, MDPI, vol. 3(4), pages 1-28, November.
    3. Bohnert, Alexander & Gatzert, Nadine & Jørgensen, Peter Løchte, 2015. "On the management of life insurance company risk by strategic choice of product mix, investment strategy and surplus appropriation schemes," Insurance: Mathematics and Economics, Elsevier, vol. 60(C), pages 83-97.

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    More about this item

    Keywords

    Participating life insurance contracts; Policies with profits; Interest rate guarantees;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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