A sharing rule for multi-period interest-sensitive insurance contracts

Abstract

As sales of interest-sensitive products grow in insurance markets, determining a sharing rule for allocating investment returns between a policyholder and an insurer is crucial. This paper discusses a theoretical sharing rule for a multi-period contract, reflecting that the insurer’s investment efforts are unobservable and that a stream of information inferring the quality of the efforts exists. Our sharing rule is developed by selecting multi-period excess returns as available information and maximizing the expected utility of the policyholder. The empirical analysis shows that the effect of multi-period excess returns on insurers’ sharing patterns is consistent with the theoretical findings.