An analysis of transaction costs in participating life insurance under mean-variance preferences

Journal article


Publication Details

Author(s): Gatzert N
Journal: Insurance Mathematics & Economics
Publication year: 2019
Volume: 85
Pages range: 185-197
ISSN: 0167-6687


Abstract

Transaction costs with respect to distribution and administration play a crucial role for the performance of participating life insurance products. The aim of this paper is to investigate the impact of such initial and annual transaction costs on policyholder mean-variance preferences depending on the contract features, comparing a point-to-point guarantee, a cliquet-style guarantee, and a money-back guarantee with annual surplus component. We extend previous work by deriving analytical solutions for the maximum allowed initial transaction costs as well as the risk aversion parameter that ensure a given customer preference level for different contract types. We further conduct simulation analyses to identify key factors in regard to transaction costs. One main finding is that in the present setting, insurers can indeed charge higher costs for more complex products with cliquet-style features, and that the difference in costs between the various product types increases considerably in a low interest-rate environment. However, these results are heavily impacted and even reversed depending on the risk-return asset characteristics, as insurers with a riskier asset management strategy may no longer be able to charge higher transaction costs for complex products with a strong annual cliquet-style surplus participation component without reducing their attractiveness to customers. (C) 2019 Elsevier B.V. All rights reserved.


FAU Authors / FAU Editors

Gatzert, Nadine Prof. Dr.
Lehrstuhl für Versicherungswirtschaft und Risikomanagement


How to cite

APA:
Gatzert, N. (2019). An analysis of transaction costs in participating life insurance under mean-variance preferences. Insurance Mathematics & Economics, 85, 185-197. https://dx.doi.org/10.1016/j.insmatheco.2019.01.003

MLA:
Gatzert, Nadine. "An analysis of transaction costs in participating life insurance under mean-variance preferences." Insurance Mathematics & Economics 85 (2019): 185-197.

BibTeX: 

Last updated on 2019-10-04 at 20:08