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A Proposal on How the Regulator Should Set Minimum Interest Rate Guarantees in Participating Life Insurance Contracts

Authors

  • Hato Schmeiser,

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    • Hato Schmeiser and Joël Wagner are with the Institute of Insurance Economics, University of St. Gallen, Kirchlistrasse 2, CH-9010 St. Gallen, Switzerland. The authors can be reached via e-mail: hato.schmeiser@unisg.ch and joel.wagner@unisg.ch. The authors would like to thank the anonymous referees for their comments helping to improve earlier versions of the paper.
  • Joël Wagner

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    • Hato Schmeiser and Joël Wagner are with the Institute of Insurance Economics, University of St. Gallen, Kirchlistrasse 2, CH-9010 St. Gallen, Switzerland. The authors can be reached via e-mail: hato.schmeiser@unisg.ch and joel.wagner@unisg.ch. The authors would like to thank the anonymous referees for their comments helping to improve earlier versions of the paper.

Abstract

We consider a contingent claim model framework for participating life insurance contracts and assume a competitive market with minimum solvency requirements as provided by Solvency II. In a first step, the implications of the regulator's imposing a particular interest rate guarantee on the insurer's asset allocation are analyzed in a reference situation. We study the sensitivity of the interaction between the interest rate guarantee and the asset allocation when the risk-free interest rate changes. Particular attention is paid to the current market situation where the guaranteed interest rate is often close to the risk-free interest rate. In a second step, we assess at what level the interest rate guarantee should be set by the regulator in order to maximize policyholders' utility. We show that the results yielded by the proposed concept to derive an optimal value for the interest rate guarantee are very stable for various model parameters.

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