Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/104466 
Year of Publication: 
2006
Series/Report no.: 
Discussion Paper No. 2006-04
Publisher: 
Ludwig-Maximilians-Universität München, Fakultät für Betriebswirtschaft, München
Abstract: 
This paper analyzes the numerical impact of different surplus distribution mechanisms on the risk exposure of a life insurance company selling with profit life insurance policies with a cliquet-style interest rate guarantee. Three representative companies are considered, each using a different type of surplus distribution: A mechanism, where the guaranteed interest rate also applies to surplus that has been credited in the past, a slightly less restrictive type in which a guaranteed rate of interest of 0% applies to past surplus, and a third mechanism that allows for the company to use former surplus in order to compensate for underperformance in “bad” years. Our study demonstrates that regulators should be very careful in deciding which design of a distribution mechanism is to be enforced. Within our model framework, a distribution mechanism of the third type yields preferable results with respect to the considered risk measure. In particular, throughout the analysis, our representative company 3 faces ceteris paribus a significantly lower shortfall risk than the other two companies. Requiring “strong” guarantees puts companies at a significant competitive disad¬vantage relative to insurers which are subject to regulation that only requires the third type of surplus distribution mechanism. This is particularly true, if annual minimum participation in the insurer’s investment returns is mandatory for long term contracts.
Subjects: 
life insurance
interest guarantees
surplus distribution
JEL: 
G18
G22
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.