What Transaction Costs are Acceptable in Life Insurance Products from the Policyholders' Viewpoint?
Details
State: Public
Version: Author's accepted manuscript
License: Not specified
Serval ID
serval:BIB_08C9BAB31C2E
Type
Article: article from journal or magazin.
Collection
Publications
Institution
Title
What Transaction Costs are Acceptable in Life Insurance Products from the Policyholders' Viewpoint?
Journal
Journal of Risk Finance
ISSN
1526-5943
Publication state
Published
Issued date
2016
Peer-reviewed
Oui
Volume
17
Number
3
Pages
277-294
Language
english
Abstract
Purpose
- The purpose of this paper is to analyze what transaction costs are acceptable for customers in different investments. In this study, two life insurance contracts, a mutual fund and a risk-free investment, as alternative investment forms are considered. The first two products under scrutiny are a life insurance investment with a point-to-point capital guarantee and a participating contract with an annual interest rate guarantee and participation in the insurer's surplus. The policyholder assesses the various investment opportunities using different utility measures. For selected types of risk profiles, the utility position and the investor's preference for the various investments are assessed. Based on this analysis, the authors study which cost levels can make all of the products equally rewarding for the investor.
Design/methodology/approach
- The paper notes the risk-neutral valuation calibration using empirical data utility and performance measurement dynamics underlying: geometric Brownian motion numerical examples via Monte Carlo simulation.
Findings
- In the first step, the financial performance of the various saving opportunities under different assumptions of the investor's utility measurement is studied. In the second step, the authors calculate the level of transaction costs that are allowed in the various products to make all of the investment opportunities equally rewarding from the investor's point of view. A comparison of these results with transaction costs that are common in the market shows that insurance companies must be careful with respect to the level of transaction costs that they pass on to their customers to provide attractive payoff distributions.
Originality/value
- To the best of the authors' knowledge, their research question - i.e. which transaction costs for life insurance products would be acceptable from the customer's point of view - has not been studied in the above described context so far.
- The purpose of this paper is to analyze what transaction costs are acceptable for customers in different investments. In this study, two life insurance contracts, a mutual fund and a risk-free investment, as alternative investment forms are considered. The first two products under scrutiny are a life insurance investment with a point-to-point capital guarantee and a participating contract with an annual interest rate guarantee and participation in the insurer's surplus. The policyholder assesses the various investment opportunities using different utility measures. For selected types of risk profiles, the utility position and the investor's preference for the various investments are assessed. Based on this analysis, the authors study which cost levels can make all of the products equally rewarding for the investor.
Design/methodology/approach
- The paper notes the risk-neutral valuation calibration using empirical data utility and performance measurement dynamics underlying: geometric Brownian motion numerical examples via Monte Carlo simulation.
Findings
- In the first step, the financial performance of the various saving opportunities under different assumptions of the investor's utility measurement is studied. In the second step, the authors calculate the level of transaction costs that are allowed in the various products to make all of the investment opportunities equally rewarding from the investor's point of view. A comparison of these results with transaction costs that are common in the market shows that insurance companies must be careful with respect to the level of transaction costs that they pass on to their customers to provide attractive payoff distributions.
Originality/value
- To the best of the authors' knowledge, their research question - i.e. which transaction costs for life insurance products would be acceptable from the customer's point of view - has not been studied in the above described context so far.
Keywords
Performance measurement, Transaction costs, Life insurance, Risk neutral valuation
Web of science
Create date
15/04/2016 10:10
Last modification date
15/09/2020 7:08