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On the Valuation of Investment Guarantees in Unit-linked Life Insurance: A Customer Perspective

Author

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  • Nadine Gatzert

    () (University of Erlangen-Nürnberg, Chair for Insurance Economics, Lange Gasse 20, 90403 Nuremberg, Germany.)

  • Carin Huber

    (Institute of Insurance Economics, University of St. Gallen, Kirchlistrasse 2, St. Gallen, SG 9010, Switzerland. E-mails: carin.huber@unisg.ch, hato.schmeiser@unisg.ch)

  • Hato Schmeiser

    (Institute of Insurance Economics, University of St. Gallen, Kirchlistrasse 2, St. Gallen, SG 9010, Switzerland. E-mails: carin.huber@unisg.ch, hato.schmeiser@unisg.ch)

Abstract

Interest rate guarantees in unit-linked life insurance products ensure that at contract maturity, at least a minimum guaranteed amount is paid, even if the mutual fund falls below the guaranteed level. Strongly depending on the riskiness of the underlying mutual fund, these guarantees can be of substantial value. However, while insurer pricing is based on the replication of cash flows, customers are more likely to base their decisions on individual preferences. The aim of this paper is to contrast reservation prices for guarantees in unit-linked life insurance policies based on customers’ subjective willingness to pay with a financial pricing approach, an investigation that has not been undertaken to date. To do so, we use an online questionnaire survey and calculate reservation prices using option pricing theory. Our findings reveal that even though the majority of the participants in the online questionnaire are employed in the field of insurance, subjective prices are difficult to derive and are significantly lower on average than the prices obtained using a financial pricing model. However, a considerable portion of participants is still willing to pay a substantially higher price.

Suggested Citation

  • Nadine Gatzert & Carin Huber & Hato Schmeiser, 2011. "On the Valuation of Investment Guarantees in Unit-linked Life Insurance: A Customer Perspective," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 36(1), pages 3-29, January.
  • Handle: RePEc:pal:gpprii:v:36:y:2011:i:1:p:3-29
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    Cited by:

    1. Bohnert, Alexander & Born, Patricia & Gatzert, Nadine, 2014. "Dynamic hybrid products in life insurance: Assessing the policyholders’ viewpoint," Insurance: Mathematics and Economics, Elsevier, vol. 59(C), pages 87-99.
    2. 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.
    3. Braun, Alexander & Schmeiser, Hato & Schreiber, Florian, 2016. "On consumer preferences and the willingness to pay for term life insurance," European Journal of Operational Research, Elsevier, vol. 253(3), pages 761-776.
    4. Orozco-Garcia, Carolina & Schmeiser, Hato, 2015. "How sensitive is the pricing of lookback and interest rate guarantees when changing the modelling assumptions?," Insurance: Mathematics and Economics, Elsevier, vol. 65(C), pages 77-93.

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