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New Life Insurance Financial Products

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Handbook of Insurance

Abstract

This chapter provides an overview of new life insurance financial products. After a general market overview, Sect. 36.2 presents different forms of traditional and innovative life insurance financial products and their main characteristics. Since unit-linked and equity- indexed type contracts represent the basis for most innovative products in recent years, Sect. 36.3 presents basic aspects of the modeling, valuation, and risk management of unit- linked life insurance contracts with two forms of investment guarantees (interest rate and lookback guarantees) and different underlying investment strategies. In Sect. 36.4, variable annuities are discussed and focus is laid on challenges for insurers in regard to pricing and risk management of the various embedded options. Section 36.5 finally puts the customer’s perspective in the center of the analysis, along with a discussion of current developments regarding product information documents and performance and risk-return profiles, which is of special relevance for new and traditional products.

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Notes

  1. 1.

    See, e.g., www.annuities-online.com/AnnuityOverview.htm.

  2. 2.

    A more detailed analysis of different types of ratchets (simple or compounding the returns monthly or annually) in equity-indexed annuities can be found in Hardy (2004).

  3. 3.

    See ITA (2010) for more detailed information about the product.

  4. 4.

    See, e.g., Ainslie (2001, p. 16), Brown and Scahill (2010, pp. 5–6), and Cooperstein et al. (2004, pp. 14–15).

  5. 5.

    We subsume similar life insurance products that do not contain any embedded options or guarantees to the group of unit-linked products (see Sect. 36.2.1). The data provided in this section are based on variable annuities that include investment guarantees in respect to death and/or living benefits.

  6. 6.

    The EIOPA is part of the European system of financial supervision consisting of three European supervisory authorities and the European Systemic Risk Board. It is an independent advisory body to the European Parliament and the Council of the European Union.

  7. 7.

    See EIOPA-11/031, available via www.eiopa.europa.eu.

  8. 8.

    See EIOPA-11/031, available via www.eiopa.europa.eu.

  9. 9.

    It can be noted that there is a parallel to the executive compensation literature where a likely different valuation of stock options by the issuing company and the recipient (the executive) can take place; see, e.g., Lambert et al. (1991).

  10. 10.

    In this setting, only the financial part of the contract is taken into account without early death or surrender, i.e., focus is laid on a two-point-in-time setting that does not include time preferences.

  11. 11.

    For the optimization procedure, several approaches can be used, such as genetic optimization, differential evolution, or the Nelder–Mead simplex method. See Kellner (2011) for an overview of optimization methods with an application to insurance problems.

  12. 12.

    In particular, depending on their preferences and diversification possibilities, customers may even prefer a product with higher shortfall risk relative to other contracts but that is simpler by only including one contract parameter, for instance. Concrete numbers for the case of participating life insurance policies using a simulation study can be found in Gatzert (2013).

  13. 13.

    See ZEW (2010, p. 95), http://ec.europa.eu/internal_market/finservices-retail/investment_products_en.htm, European Commission KOM(2009) 204.

  14. 14.

    See ZEW (2010, p. 96), OECD (2009, pp. 8, 10).

  15. 15.

    See ZEW (2010), Institut für finanzdienstleistungen (2012).

  16. 16.

    See FSA (2000, 2005, 2006).

  17. 17.

    See FSA (2011).

  18. 18.

    See ZEW (2010, pp. 97, 100).

  19. 19.

    ZEW (2010, p. 98) and http://www.govtrack.us/congress/bills/111/hr1984(06/10/2012).

  20. 20.

    Graf et al. (2012) also derive risk-return profiles using the internal rate of return based on a model with stochastic interest rates and stock returns with stochastic volatility. These risk-return profiles are then compared for different types of unit-linked and equity-linked products with and without guarantees as well as different ways of general charges.

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Authors and Affiliations

  1. Chair for Insurance Economics and Risk Management, Friedrich-Alexander-University of Erlangen-Nürnberg, Erlangen, Germany

    Nadine Gatzert

  2. Chair for Risk Management and Insurance, University of St. Gallen, St Gallen, Switzerland

    Hato Schmeiser

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  1. Nadine Gatzert
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Correspondence to Nadine Gatzert .

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  1. Finance, HEC Montreal, Montreal, Québec, Canada

    Georges Dionne

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Gatzert, N., Schmeiser, H. (2013). New Life Insurance Financial Products. In: Dionne, G. (eds) Handbook of Insurance. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-0155-1_36

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