Innovative Equity-Linked Life Insurance Based on Traditional Products: The Case of Select-Products

Abstract

Select Products are equity-linked life insurances with investment guarantee in the German market which – in contrast to typical guaranteed equity-linked products – are constructed by using a traditional life insurance contract and suitably leveraging the annual surplus distribution. In this paper, we describe the unique features of traditional life insurance (particularly the collective savings process) and analyze how these features contribute to such products. We present a model framework for the most prominent type of Select Products and compare the product design when offered by a bank or an insurer. Our analysis emphasizes that the current attractiveness of such products arises from the unique features of traditional life insurance by pooling 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. We also explain how such products with alternative guarantees interact with an insurer’s book of business and can help reduce the risks resulting from “old guarantees”.