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The Benefit of Life Insurance Contracts with Capped Index Participation When Stock Prices are Subject to Jump Risk

  • We analyze the benefit to the insured of newly traded, innovative life insurance contracts. On a sequence of yearly reference days, the insured can choose between a guaranteed return (linked to the insurer’s asset result) and a capped index participation. The cap is adjusted at the beginning of each year such that both alternatives have the same value and the option to select is costless (product structuring condition). We point out that this condition cannot always be met. If the guaranteed return exceeds the upper bound of the capped index participation, the insurer can make a side profit. We show that a rather low insurance result also implies a rather low stock exposure, even if the insured opts for the index participation. Concerning the impact of the index dynamics, we emphasize that it is important to distinguish between jump and diffusion risk because the pricing of jump risk has an impact on cap rates that can be offered to an insured. Finally, we show that the optimal decision strategy of a CRRA investor implies an indexWe analyze the benefit to the insured of newly traded, innovative life insurance contracts. On a sequence of yearly reference days, the insured can choose between a guaranteed return (linked to the insurer’s asset result) and a capped index participation. The cap is adjusted at the beginning of each year such that both alternatives have the same value and the option to select is costless (product structuring condition). We point out that this condition cannot always be met. If the guaranteed return exceeds the upper bound of the capped index participation, the insurer can make a side profit. We show that a rather low insurance result also implies a rather low stock exposure, even if the insured opts for the index participation. Concerning the impact of the index dynamics, we emphasize that it is important to distinguish between jump and diffusion risk because the pricing of jump risk has an impact on cap rates that can be offered to an insured. Finally, we show that the optimal decision strategy of a CRRA investor implies an index selection even if it is unfairly priced such that the insurer indeed makes a side profit.show moreshow less

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Metadaten
Institutes:Fakultät Sozial- und Wirtschaftswissenschaften / Lehrstuhl für Betriebswirtschaftslehre, insbesondere Banking und Finanzcontrolling
Author:Antje Mahayni, Matthias Muck
Title of the journal / compilation (English):Review of Derivatives Research
Place of publication:Dordrecht [u.a.]
Publisher:Springer Science + Business Media B.V,
Year of publication:2017
Issue:(2017), First Online: 16 March 2017
Pages / Size:Elektronische Ressource (28 Seiten)
Keywords:capped index participation; derivatives; interest rate guarantees; life insurance; monthly sum cap
DOI:https://doi.org/10.1007/s11147-017-9131-9
ISSN:1573-7144
Document Type:Article in a journal
Language:English
Peer Review:Ja
Internationale Verbreitung:Ja
Release Date:2017/06/01