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Mixed participating and unit-linked life insurance contracts: design, pricing and optimal strategy

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  • Vanessa Hanna
  • Peter Hieber
  • Pierre Devolder

Abstract

In many countries, the decline in interest rates has reduced the interest in traditional participating life insurance contracts with investment guarantees and has led to a shift to unit-linked policies without guarantees. We design a novel mixed insurance contract splitting premium payments between a participating and a unit-linked fund. An additional guarantee fee is applied on the unit-linked return in order to increase the investment guarantee of the participating fund. In a utility-based framework, using power utility and prospect theory as preference functions, we show that the mixed product is usually perceived more attractive than a full investment in either the unit-linked or the participating contract. The guarantee fee is beneficial for conservative investors interested in stronger protection against losses. This is also interesting from a marketing perspective: By the increase of the guarantee in the participating product, zero or negative guaranteed rates can be avoided.

Suggested Citation

  • Vanessa Hanna & Peter Hieber & Pierre Devolder, 2022. "Mixed participating and unit-linked life insurance contracts: design, pricing and optimal strategy," Scandinavian Actuarial Journal, Taylor & Francis Journals, vol. 2022(5), pages 421-446, May.
    • Handle: RePEc:taf:sactxx:v:2022:y:2022:i:5:p:421-446
    DOI: 10.1080/03461238.2021.1992001
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    File URL: http://hdl.handle.net/10.1080/03461238.2021.1992001
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    Cited by:

    1. Vanessa Hanna & Pierre Devolder, 2023. "Optimal Choice between Defined Contribution and Cash Balance Pension Schemes: Balancing Interests of Employers and Workers," Risks, MDPI, vol. 11(7), pages 1-21, July.

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