Policy characteristics and stakeholder returns in participating life insurance: which contracts can lead to a win-win?

Abstract

Participating life insurance contracts and pension plans often include a return guarantee and participation in the surplus of the institution’s result. The final account value in such contracts depends on the investment policy driven by solvency requirements, as well as on the level of market returns, the guarantee and the participation rates. Using a contingent claim model for such contracts, we assume a competitive market with minimum solvency requirements similar to Solvency II. We consider solvency requirements on maturity and 1-year time horizons, as well as contracts with single and periodic premium payments. Through numerical analyses, we link the expected returns for equity holders and policyholders in various situations. Using the return on equity and policyholder internal rate of return along with utility measures, we assess which contract settings optimize the return compromise for both stakeholders in a low-interest-rate environment. Our results extend the academic literature by building on the work by Schmeiser and Wagner (J Risk Insur 82(3):659–686, 2015) and are relevant for practitioners, given the current financial market environment and difficulties in insurance-linked savings plans with guarantees.