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Investment guarantees in unit-linked life insurance from the customer perspective

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Zeitschrift für die gesamte Versicherungswissenschaft

Abstract

Interest rate guarantees are a typical contract feature in unit-linked-life insurance products. As the financial crisis of 2007/2008 has shown, these guarantees can be of substantial value for policyholders since they ensure that at least a minimum amount will be paid back even if the mutual fund value falls below a specific guaranteed level. However, from the insurance company’s view, these guarantees can be costly—especially in highly volatile markets—due to the required risk management measures which must be undertaken to secure the guarantees promised to the customers. Thus, the aim of this paper is to investigate whether customers really value these guarantees and if their willingness to pay (WTP) is sufficient to cover the guarantee costs. To elicit customer WTP, we use an online questionnaire and compare these results to the actual guarantee costs calculated with the Black and Scholes option pricing formula. One main finding is that even though most of the participants in the online questionnaire work in the financial industry, subjective prices are difficult to derive and are lower, on average, than the prices obtained using a financial pricing model. However, many participants are still willing to pay a substantially higher price.

Zusammenfassung

Fondsgebundene Lebensversicherungsprodukte enthalten mitunter Investmentgarantien in Form von Mindestverzinsungszusagen. Insbesondere in der Finanzkrise im Jahr 2007/2008 und den starken Verlusten in zahlreichen Anlageklassen wurde der Mehrwert dieser Art von Garantien für den Versicherungsnehmer unmittelbar sichtbar. Grundsätzlich ist für Versicherungsunternehmen die Gewährleistung solcher Garantien auf Basis adäquater Risikomanagementmassnahmen aufwändig und kostspielig. Somit stellt sich die Frage, inwieweit Kunden Finanzgarantien schätzen und ob deren Zahlungsbereitschaft ausreicht, um die beim Versicherer entstehenden Risikomanagementkosten zu decken. Die Zahlungsbereitschaft der Kunden wurde mittels einer Online-Umfrage erhoben. Die daraus resultierenden Ergebnisse wurden mit den auf optionspreistheoretischer Basis ermittelten Garantiekosten verglichen. Eines der Hauptergebnisse zeigt zum einen, dass obwohl der Grossteil der Befragten im Finanzdienstleistungssektor arbeitet die subjektive Zahlungsbereitschaft nur schwer abzuleiten ist. Zum anderen ist die durchschnittliche Zahlungsbereitschaft im Allgemeinen erheblich geringer als die auf Basis der Optionspreistheorie berechneten Mindestgarantiekosten. Dennoch ist ein gewisser Anteil der Befragten bereit, auch deutlich mehr als die Mindestgarantiekosten zu bezahlen.

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Notes

  1. The mental models believed to be in play during insurance purchase decisions include the following: anchoring, i.e., the adjustment on an initial value (Tversky and Kahneman 1974); an availability bias, i.e., the evaluation depends on how easily something comes to mind (Tversky and Kahneman 1973); a certainty effect, i.e., the overweighting of certain outcomes relative to probable outcomes (Allais 1953; Tversky and Wakker 1995); framing, i.e., reliance on how information is presented (Tversky and Kahneman 1981, 1986; Kahneman and Tversky 1984); loss aversion, i.e., losses loom larger than corresponding gains (Tversky and Kahneman 1991); mental accounting, i.e., the dividing of current and future assets into separate, non-transferable portions (Thaler 1999); wishful thinking, and overconfidence, e.g., by overestimating own knowledge and ability to control events, while underestimating risks (Barberis and Thaler 2005); risk perception (Slovic 1972; Slovic et al. 1977) or an overestimation of probabilities (Johnson et al. 1993).

  2. For details and formal representations of the model framework see Gatzert et al. (2010).

  3. See Gatzert et al. (2010).

  4. For an overview of methods for measuring consumer WTP, see Diller (2000) and Völckner (2005, 2006). A detailed description of the empirical survey is given in Gatzert et al. (2010).

  5. Biases that were eliminated or controlled included (a) the availability bias—dealt with by concentrating on an insurance- or finance-related sample, (b) framing effects, risk perception, and overestimation of probabilities—dealt with by using graphical, verbal, and numerical illustrations of the probabilities (see Fig. 3), and (c) anchoring—dealt with by the order of the questions.

  6. The reasons for elimination were: (a) obviously false statements concerning WTP, possibly due to a desire to move on to the next question in the survey (e.g., 123456) and (b) disproportionate overestimation of WTP, possibly due to the question being too difficult for the particular participant to understand (e.g., WTP twice as high as the initial premium invested in the fund).

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Authors and Affiliations

  1. Chair for Insurance Economics, University of Erlangen-Nürnberg, Lange Gasse 20, 90403, Nürnberg, Germany

    Nadine Gatzert

  2. Institute of Insurance Economics, University of St. Gallen, Kirchlistrasse 2, 9010, St. Gallen, Switzerland

    Carin Huber & Hato Schmeiser

Authors
  1. Nadine Gatzert
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  2. Carin Huber
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  3. Hato Schmeiser
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Correspondence to Carin Huber.

Additional information

This paper summarizes the main findings of the paper by Gatzert, Huber, and Schmeiser (2010) that was presented at the annual meeting of the German Association for Insurance Science in Düsseldorf in March 2010 and which is to appear in the Geneva Papers on Risk and Insurance. Details regarding the applied methods and the survey can be found in the original paper.

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Gatzert, N., Huber, C. & Schmeiser, H. Investment guarantees in unit-linked life insurance from the customer perspective. ZVersWiss 99, 627–636 (2010). https://doi.org/10.1007/s12297-010-0126-y

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