Skip to main content
SpringerLink
Log in

Runoff or redesign? Alternative guarantees and new business strategies for participating life insurance

  • Original Research Paper
  • Published:
European Actuarial Journal Aims and scope Submit manuscript

Abstract

Portfolios of traditional participating life insurance contracts with year-to-year (cliquet-style) guarantees are under pressure in the current situation of persistently low interest rates when valued in a market consistent valuation framework. For a portfolio with a fixed technical interest rate it has been shown in Reuß et al. (Innov Quant Risk Manag 99:185–208, 2015) that product designs with alternative guarantees are able to reduce the insurers risk and increase capital efficiency. The objective of this paper is to analyze interactions between new contracts and an existing book of insurance contracts. We consider an insurer that has built up a portfolio in the past under changing guaranteed interest rates and market conditions. Then, we analyze different new business strategies for this insurer and the resulting risk exposure and capital requirement. We show that—if all contracts are covered by the same pool of assets—switching to carefully designed participating contracts with alternative guarantees is typically preferable to a runoff scenario and can substantially reduce financial risk in future years.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6

Similar content being viewed by others

Notes

  1. Since 2011 German life insurers have to set up an additional reserve (so-called “Zinszusatzreserve”) for contracts with a technical interest rate above a certain reference rate. This reference rate is updated every year by a prescribed mechanism based on Euro swap rates of the current and previous years (cf. “Deckungsrckstellungsverordnung” (DeckRV), §5), and amounts to 2.88% for year-end 2015.

  2. For example, Zurich Deutscher Herold Lebensversicherung stopped new business in participating life insurance in 2013, and now offers so-called “select products”. Generali Deutschland announced in a press release in May 2015 their target to discontinue participating life insurance and focus on offering unit-linked insurance. The Talanx group announced in July 2015 to sell new business from the end of 2016 on only with a return-of-premium guarantee (instead of a guaranteed interest rate). Even though such announcements are perceived in public often as a full withdrawal from traditional participating contracts, the new product strategies are mostly redesigned traditional contracts that are similar to the concepts discussed in Reuß et al. [25] and Alexandrova et al. [1].

  3. Cf. EIOPA [11], Article 45.

  4. However, mortality influences the development of the modeled insurance portfolio (explained in the following sections), and is therefore taken into account for the projections.

  5. Annual surplus is typically credited to such policies according to country specific regulation. In Germany, at least 90% of the (local GAAP book value) investment income on the insurer’s assets has to be credited to the policyholders’ accounts. Please note that it is not within the scope of this paper to analyze if European regulators would agree with the alternative products (and the surplus distribution applied to them) as they are presented here, or if certain restrictions would be imposed. However, in the insurance supervision laws e.g. in Austria and Switzerland regulations have been included that definitely allow product designs like the Alternative 1 product presented in this paper (cf. e.g. “Versicherungsaufsichtsgesetz 2016” (VAG 2016), §92 for Austrian regulation).

  6. This definition makes sure that the account value remains non-negative, never falls below the actuarial reserve and earns at least the year-to-year guaranteed interest rate.

  7. Further explanations on the applied asset-liability model are given in Reuß et al. [25, 26].

  8. As in Reuß et al. [25] we do not explicitly consider the shareholders’ equity or other reserves on the liability side since our analyses for the insurance portfolio are performed on a stand-alone basis.

  9. As stated in Reuß et al. [25], p. 196: ’We do not consider the shareholders’ default put option resulting from their limited liability, which is in line with both, Solvency II valuation standards and the Market Consistent Embedded Value framework (MCEV), cf. Bauer et al. [4]; CFO-Forum [9], G7.2 and DAV [10], section 5.3.4.’

  10. The valuation dates are generally set at the beginning of the year (and not at the end) to simplify the presentation of the results only. The valuation does not include new business of that year unless stated otherwise.

  11. Note that since 2011 an additional reserve, so-called “Zinszusatzreserve” (as outlined in Footnote 1), exists under German regulation for contracts with a high technical rate which is calculated by replacing the original technical rate by a certain (lower) reference rate for a certain period of time. However, this rule is not considered in the model of this paper. We believe that in order to provide a more universal analysis (applicable also for different settings) and pure comparison of the different portfolios and product types, the effects of this country specific regulation should be left out of consideration. However, we want to point out that taking into account this additional reserve (which has been introduced to handle the current low interest rate environment) could change the surplus amount and therefore reduce risks from traditional contracts in certain scenarios, and lead to somewhat different results.

  12. In reality, in 1994 and 2000, the maximal technical rate was changed by July 1st. Since we assume that all new contracts are sold at the beginning of the year, the rate valid until June 30th is applied for the respective years. After 2016, the maximal technical rate regulated by law might change in reality, but we will assume for our new business analyses that the insurer keeps the level from 2015 for future contracts.

  13. Cf. Bundesbank [8].

  14. We note that swap rates can deviate from the rates of government bonds, and are thus not fully comparable. However, for our purpose of modeling a representative insurance portfolio the difference is negligible.

  15. Applying a risk-neutral measure is in line with the MCEV valuation principles and Solvency II standards (cf. CFO-Forum [9] and EIOPA [12]).

  16. Cf. Vasicek [28].

  17. Cf. Zaglauer and Bauer [29].

  18. See Seyboth [27] as well as Branger and Schlag [6].

  19. Cf. Oechslin et al. [24].

  20. As in Reuß et al. [25], we apply an antithetic path selection of the random numbers in order to reduce variance in the sample, cf. e.g. Glasserman [15].

  21. The concept of PVFP is introduced as part of the MCEV Principles in CFO-Forum [9].

  22. Cf. CFO-Forum [9].

  23. Compare the TVOG analyses in Reuß et al. [25].

  24. A description of the standard formula can be found in the Delegated Regulation (EU) 2015/35 (cf. EIOPA [12]).

  25. Note that due to mortality before 2014, the number of contracts for the different remaining times to maturity is not the same.

  26. Cf. EIOPA [11], Article 45.

  27. This value is derived from the par yield under risk-neutral returns in the CE scenario of the stochastic projections with basic parameters described in Sect. 2.4.

  28. This value is derived from the par yield under risk-neutral returns in the CE scenario of the stochastic projections with stress parameters described in Sect. 2.4

  29. Compare for example the approach in Reuß et al. [26].

  30. See Reuß et al. [26].

References

  1. Alexandrova M, Bohnert A, Gatzert N, Ruß J (2015) Innovative equity-linked life insurance based on traditional products: the case of select-products. Working Paper, University of Erlangen-Nürnberg

  2. Barbarin J, Devolder P (2005) Risk measure and fair valuation of an investment guarantee in life insurance. Insur Math Econ 37(2):297–323

    Article  MathSciNet  MATH  Google Scholar 

  3. Bauer D, Kiesel R, Kling A, Russ J (2006) Risk-neutral valuation of participating life insurance contracts. Insur Math Econ 39(2):171–183

    Article  MathSciNet  MATH  Google Scholar 

  4. Bauer D, Reuss A, Singer D (2012) On the calculation of solvency capital requirement based on nested simulations. ASTIN Bull 42(2):453–499

    MathSciNet  MATH  Google Scholar 

  5. Berdin E, Gründl H (2015) The effects of a low interest rate environment on life insurers. Geneva Pap Risk Insur 40(3):385–415

    Article  Google Scholar 

  6. Branger N, Schlag C (2004) Zinsderivate. Modelle und Bewertung, Berlin

  7. Briys E, de Varenne F (1997) On the risk of insurance liabilities: debunking some common pitfalls. J Risk Insur 64(4):637–694

    Article  Google Scholar 

  8. Bundesbank (2015) Makrokonomische Zeitreihen. http://www.bundesbank.de/Navigation/DE/Statistiken/Zeitreihen_Datenbanken/Makrooekonomische_Zeitreihen/makrooekonomische_zeitreihen_node.html

  9. CFO-Forum (2016) Market consistent embedded value principles. http://www.cfoforum.nl/downloads/CFO-Forum_MCEV_Principles_and_Guidance_April_2016.pdf

  10. DAV (2011) DAV Fachgrundsatz zum market consistent embedded value. Köln. https://aktuar.de/unsere-themen/fachgrundsaetze-oeffentlich/2011-06-16-MCEV-final.pdf

  11. EIOPA (2009) Directive 2009/138/EC of the European Parliament and of the Council. http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02009L0138-20140523&from=EN

  12. EIOPA (2015) Delegated regulation (EU) 2015/35. http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2015:012:FULL&from=EN

  13. Gatzert N (2008) Asset management and surplus distribution strategies in life insurance: an examination with respect to risk pricing and risk measurement. Insur Math Econ 42(2):839–849

    Article  MathSciNet  MATH  Google Scholar 

  14. Gatzert N, Kling A (2007) Analysis of participating life insurance contracts: a unication approach. J Risk Insur 74(3):547–570

    Article  Google Scholar 

  15. Glasserman P (2003) Monte Carlo methods in financial engineering. Springer, New York

    Book  MATH  Google Scholar 

  16. Graf S, Kling A, Russ J (2011) Risk analysis and valuation of life insurance contracts: combining actuarial and financial approaches. Insur Math Econ 49(1):115–125

    Article  MathSciNet  MATH  Google Scholar 

  17. Grosen A, Jensen B, Jørgensen P (2001) A finite dierence approach to the valuation of path dependent life insurance liabilities. Geneva Pap Risk Insur Theory 26:57–84

    Article  Google Scholar 

  18. Grosen A, Jørgensen P (2000) Fair valuation of life insurance liabilities: the impact of interest rate guarantees, surrender options, and bonus policies. Insur Math Econ 26(1):37–57

    Article  MATH  Google Scholar 

  19. Grosen A, Jørgensen P (2002) Life insurance liabilities at market value: an analysis of insolvency risk, bonus policy, and regulatory intervention rules in a barrier option framework. J Risk Insur 69(1):63–91

    Article  Google Scholar 

  20. Hieber P, Korn R, Scherer M (2015) Analyzing the effect of low interest rates on the surplus participation of life insurance policies with different annual interest rate guarantees. Eur Actuar J 5(1):11–28

    Article  MathSciNet  MATH  Google Scholar 

  21. Kling A, Richter A, Russ J (2007) The impact of surplus distribution on the risk exposure of with profit life insurance policies including interest rate guarantees. J Risk Insur 74(3):571–589

    Article  Google Scholar 

  22. Kling A, Richter A, Russ J (2007) The interaction of guarantees, surplus distribution, and asset allocation in with-prot life insurance policies. Insur Math Econ 40(1):164–178

    Article  MATH  Google Scholar 

  23. Miltersen K, Persson S-A (2003) Guaranteed investment contracts: distributed and undistributed excess return. Scand Actuar J 103(4):257–279

    Article  MathSciNet  MATH  Google Scholar 

  24. Oechslin J, Aubry O, Aellig M (2007) Replicating embedded options. Life Pensions, pp. 47–52

  25. Reuß A, Ruß J, Wieland J (2015) Participating life insurance contracts under risk based solvency frameworks: how to increase capital efficiency by product design. Innov Quant Risk Manag, Springer Proceedings in Mathematics and Statistics 99:185–208

  26. Reuß A, Ruß J, Wieland J (2016) Participating life insurance products with alternative guarantees: reconciling policyholders’ and insurers’ interests. Risks 4(2):11 (Special issue: life insurance and pensions)

    Article  Google Scholar 

  27. Seyboth M (2011) Der Market Consistent Appraisal Value und seine Anwendung im Rahmen der wertorientierten Steuerung von Lebensversicherungsunternehmen. PhD Thesis, University of Ulm

  28. Vasicek O (1977) An equilibrium characterization of the term structure. J Financial Econ 5(2):177–188

    Article  Google Scholar 

  29. Zaglauer K, Bauer D (2008) Risk-neutral valuation of participating life insurance contracts in a stochastic interest rate environment. Insur Math Econ 43(1):29–40

    Article  MathSciNet  MATH  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Ulm University and Institut für Finanz- und Aktuarwissenschaften (ifa), Lise-Meitner-Straße 14, 89081, Ulm, Germany

    Jochen Wieland

Authors
  1. Jochen Wieland
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Jochen Wieland.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Wieland, J. Runoff or redesign? Alternative guarantees and new business strategies for participating life insurance . Eur. Actuar. J. 7, 29–50 (2017). https://doi.org/10.1007/s13385-016-0140-0

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s13385-016-0140-0

Keywords

Search

Navigation