Equity‐Linked Life Insurance

Abstract

Abstract Equity‐linked life insurance contracts are characterized by the fact that benefits are directly linked to the value of an investment portfolio, typically composed of units of one or more mutual funds and kept separate from the other assets of the insurance company. These contracts generally imply a rather high level of financial risk that can be totally charged to the policyholder, in pure equity‐linked contracts , or shared between the policyholder and the insurance company, in guaranteed equity‐linked contracts . In the first case the insurance company acts as a mere financial intermediary, while in the second case it has to set up suitable hedging strategies because the financial risk is of systematic nature and cannot be eliminated by sufficiently increasing the size of its portfolio. In this contribution we first describe, in general terms, the main characteristics of equity‐linked products and their advantages with respect to other types of life insurance and investment contracts. Then we pass to analyze how the investment portfolio to which benefits are linked evolves over time and, finally, to present some possible approaches that the insurance company can follow in order to hedge the liabilities arising from the issue of minimum guarantees.