Solvency risk minimizing guaranteed returns in life insurance

Szüle, Borbála (2016) Solvency risk minimizing guaranteed returns in life insurance. Working Paper. Corvinus University of Budapest Faculty of Economics.

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Return guarantee constitutes a key ingredient of classical life insurance premium calculation. In the current low interest rate environment insurers face increasingly strong financial incentives to reduce guaranteed returns embedded in life insurance contracts. However, return guarantee lowering efforts are restrained by associated demand effects, since a higher guaranteed return makes the net price of the insurance cover lower. This tradeoff between possibly higher future insurance obligations and the possibility of a larger demand for life insurance products can theoretically also be considered when determining optimal guaranteed returns. In this paper, optimality of return guarantee levels is analyzed from a solvency point of view. Availability and some other properties of optimal solutions for guaranteed returns are explored and compared in a simple model for two measures of solvency risk (company-level and contract-level VaR). The paper concludes that a solvency risk minimizing optimal guaranteed return may theoretically exist, although its practical availability can be impeded by economic and regulatory constraints.

Item Type:Monograph (Working Paper)
Series Name:Corvinus Economics Working Papers - CEWP
Series Number / Identification Number:2016/02
Uncontrolled Keywords:risk analysis, insurance
JEL classification:G11 - Portfolio Choice; Investment Decisions
G22 - Insurance; Insurance Companies; Actuarial Studies
Subjects:Mathematics, Econometrics
ID Code:2196
Deposited By: Ádám Hoffmann
Deposited On:15 Jan 2016 13:54
Last Modified:15 Jan 2016 13:54

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