Equity-linked life insurance based on traditional products: the case of Select Products

Abstract

Select Products are a German version of equity-indexed annuities common in the US and Canada, which are constructed by using a traditional life insurance contract and suitably leveraging the annual surplus distribution. In this paper, we aim to provide holistic insight into Select Products by means of a comparison with American equity-indexed annuities and a detailed description of design, hedging and accounting issues. We put a special emphasis on the unique features of traditional life insurance (particularly the collective savings process) which have been widely neglected in previous literature. In addition, we present a model framework for the most prominent type of Select Products, compare the product design when offered by a bank or an insurer, and compare its risk-return profile with traditional policies. Our analysis confirms that the current attractiveness of such products arises from the unique features of traditional life insurance by pooling financial risks as well as the utilization of the balance sheet in the current low interest rate environment. We discuss these aspects in detail and further address benefits as well as detriments of these products depending on the market conditions.