A performance analysis of participating life insurance contracts

Abstract

Traditional life insurance products, in particular participating life insurance contracts, are often criticized. Their performance is often said to be poor compared to other investment alternatives. Interestingly, this perception appears to persist although very little research has been conducted into the performance of participating life insurance contracts. But are participating life insurance contracts actually bad for policyholders? We conduct a performance analysis based on contracts offered in the German market, in order to provide evidence to support decision making by policyholders.Zusammenfassung Traditionelle Lebensversicherungsprodukte wie die gemischte Kapitallebensversicherungen werden seit Jahren immer wieder kritisiert. Zu nennen ist zum Beispiel der Hamburger Ampelcheck, welcher die gemischte Kapitallebensversicherung als nicht geeignet für die Altersvorsorge ansieht. Doch wie gut oder schlecht ist dieses Versicherungsprodukt wirklich für die Versicherungsnehmer? Die Forschung in diesem Bereich ist limitiert. Deshalb führen wir eine umfassende Performanceanalyse von der gemischten Kapitallebensversicherung durch, um privaten Investoren eine Entscheidungshilfe zur Verfügung zu stellen.

The Impact of Guarantees on the Performance of Pension Saving Schemes: Insights from the Literature

“…We, thereby, take two typical guarantees in traditional and innovative life insurance into account, which comprise cliquet-style and point-to-point guarantees. In this comparative overview, we consider the contributions by Gatzert and Schmeiser [26], Jørgensen and Linnemann [27], Faust, Schmeiser, and Zemp [28], Graf, Kling, and Russ [29], Gatzert [30], Guillé n et al [31,32], and Mahlow, Schmeiser, and Wagner [33]. Our study shows that there are two different approaches in the literature how to assess the performance of pension saving contracts with guarantees.…”

“…On the basis of the payoff distribution, several risk and performance measures are calculated to enable a comparison of different guarantee schemes. These risk measures include, inter alia, the mean and standard deviation, and several quantiles of the payoff distribution (see, e.g., Gatzert and Schmeiser [26]; Jørgensen and Linnemann [27]; Faust, Schmeiser, and Zemp [28]). Performance measures, such as the Sharpe ratio, the omega, and the Sortino ratio, are determined, which are in line with maximizing expected utility for an individual decision-maker (see, e.g., Gatzert and Schmeiser [26]).…”

“…In addition to this, tests for stochastic dominance are conducted (see, Gatzert and Schmeiser [26]; Graf, Kling, and Russ [29]). Guillé n et al [31] b Guillé n et al [32] a Notes: * tests for stochastic dominance are conducted; ** Faust, Schmeiser, and Zemp [36] provide a summary of Faust, Schmeiser, and Zemp [28] and thus they are omitted here; a cliquet-style guarantees are studied; b point-to-point guarantees are studied.…”

“…In case of the cliquet-style guarantees or interest rate guarantees, three different product types can be found in the papers, namely a mutual fund investment with a yearly interest rate guarantee (see Gatzert and Schmeiser [26]), participating life insurance contracts (see Faust, Schmeiser, and Zemp [28]; Jørgensen and Linnemann [27]; Guillé n et al [32]; and Mahlow, Schmeiser, and Wagner [33]), and a Danish formula based smoothed investment-linked annuity scheme called TimePension (see Jørgensen and Linnemann [27]; and Guillé n et al [31]). Traditional participating life insurance contracts or also called traditional with-profits products have been a prominent way for pension savings and are available in several countries, e.g., in Denmark or Germany (see Faust, Schmeiser, and Zemp [28]; and Jørgensen and Linnemann [27]), where some specifics differ due to different national regulations.…”

“…Traditional participating life insurance contracts or also called traditional with-profits products have been a prominent way for pension savings and are available in several countries, e.g., in Denmark or Germany (see Faust, Schmeiser, and Zemp [28]; and Jørgensen and Linnemann [27]), where some specifics differ due to different national regulations. However, the basic product is very similar in essence.…”