Creating Customer Value in Participating Life Insurance

The value of a life insurance contract may differ depending on whether it is looked at from the customer's point of view or that of the insurance company. We assume that the insurer is able to replicate the life insurance contract's cash flows via assets traded on the capital market and can hence apply risk‐neutral valuation techniques. The policyholder, on the other hand, will take risk preferences and diversification opportunities into account when placing a value on that same contract. Customer value is represented by policyholder willingness to pay and depends on the contract parameters, that is, the guaranteed interest rate and the annual and terminal surplus participation rate. The aim of this article is to analyze and compare these two perspectives. In particular, we identify contract parameter combinations that—while keeping the contract value fixed for the insurer—maximize customer value. In addition, we derive explicit expressions for a selection of specific cases. Our results suggest that a customer segmentation in this sense, that is, based on the different ways customers evaluate life insurance contracts and embedded investment guarantees while ensuring fair values, is worthwhile for insurance companies as doing so can result in substantial increases in policyholder willingness to pay.     

Life insurance in a contingent claim framework: Pricing and regulatory implications

In this paper we develop a contingent claim model to evaluate the equity and liabilities of a life insurance company. The limited liability of shareholders is explicitly modelled. We focus on a specific type of life insurance policy—namely, the profit-sharing policy. In this policy, the policyholder is entitled to a guaranteed interest rate and a percentage of the company's yearly financial revenues. The implicit equilibrium interest rate and profit-sharing ratio are derived and analyzed. We finally discuss regulatory measures frequently encountered in the life insurance business such as rate ceilings, capital ratios, and asset restrictions.     

Optimal insurance in the presence of reinsurance

This paper studies an optimal insurance and reinsurance design problem among three agents: policyholder, insurer, and reinsurer. We assume that the preferences of the parties are given by distortion risk measures, which are equivalent to dual utilities. By maximizing the dual utility of the insurer and jointly solving the optimal insurance and reinsurance contracts, it is found that a layering insurance is optimal, with every layer being borne by one of the three agents. We also show that reinsurance encourages more insurance, and is welfare improving for the economy. Furthermore, it is optimal for the insurer to charge the maximum acceptable insurance premium to the policyholder. This paper also considers three other variants of the optimal insurance/reinsurance models. The first two variants impose a limit on the reinsurance premium so as to prevent insurer to reinsure all its risk. An optimal solution is still layering insurance, though the insurer will have to retain higher risk. Finally, we study the effect of competition by permitting the policyholder to insure its risk with an insurer, a reinsurer, or both. The competition from the reinsurer dampens the price at which an insurer could charge to the policyholder, although the optimal indemnities remain the same as the baseline model. The reinsurer will however not trade with the policyholder in this optimal solution.     

On the Interaction between Transfer Restrictions and Crediting Strategies in Guaranteed Funds

Guaranteed funds with crediting rates for fixed periods determined by a pension provider or insurance company are common features of accumulation annuity contracts. Policyholders can transfer money back and forth between these accounts and money market accounts that give them features similar to demand deposits, and yet they frequently credit a higher rate than the money market. Transfer restrictions are commonly employed to prevent arbitrage. In this article, we model the interaction between company and policyholder as a multiperiod game in which the company maximizes risk-neutral expected present value of profits and the policyholder maximizes his expected discounted utility. We find that the optimal strategy on the part of the company is to credit a rate higher than the money market rate in the first period to entice the policyholder to invest in the guaranteed fund. The company then credits the floor in the remaining periods as the policyholder transfers out the maximum amount. This does better for the policyholder in low interest rate environments and worse in high interest rate environments and acts as a type of “interest rate insurance” for the policyholder.     

Feasible fraud and auditing probabilities for insurance companies and policyholders

Insurance claims fraud is counted among the major concerns in the insurance industry, the reason being that excess payments due to fraudulent claims account for a large percentage of the total payments each year. We formulate optimization problems from the insurance company as well as the policyholder perspective based on a costly state verification approach. In this setting??while the policyholder observes his losses privately??the insurance company can decide to verify the truthfulness of incoming claims at some cost. We show simulation results illustrating the agreement range which is characterized by all valid fraud and auditing probability combinations both stakeholders are willing to accept. Furthermore, we present the impact of different valid probability combinations on the insurance company??s and the policyholder??s objective quantities and analyze the sensitivity of the agreement range with respect to a relevant input parameter. This contribution summarizes the major findings of a working paper written by Müller et?al. (Working Papers on Risk Management and Insurance (IVW-HSG), No. 92, 2011).     

保险客户价值评估新方法及其应用初探

财产保险公司往往用综合成本率等传统财务指标来衡量某类客户的价值,以此作为各项经营决策的重要依据。但该类指标容易导致经营决策的短期倾向,不能有效对接资本市场对上市保险公司的价值评估要求,也不能很好的适应“偿二代”监管体系。笔者提出一种新方法——风险收益分析法来评估客户价值,运用风险的定量模型．综合评估不同客群的收益和风险水平。客观评价客户价值。同时本文探讨了该方法在业务策略、承保规则制定、再保方案、绩效评估等领域的应用方案。     

保险市场逆向选择的信号传递博弈研究

在保险市场中,投保人比保险人更了解自己的风险状况,保险双方之间的这种信息不对称难以避免地会产生逆向选择问题,于是在保险人混同定价的情形下,低风险投保人要承受过高的费率而受损,高风险投保人因保险成本过低而削弱控制风险的激励,导致整个市场资源配置低效甚至因逆向选择螺旋而崩溃。通过引入信号传递机制来实现保险市场的分离定价,从...     

On the Lack of Participating Policy Usage by Stock Insurance Companies

Stock insurers can reduce or eliminate agency conflicts between policyholders and stockholders by issuing participating insurance. Despite this benefit, most stock companies don't offer participating contracts. This study explains why. We study an equilibrium with both stock and mutual insurers in which stockholders set premiums to provide a fair expected return on their investment, and with a policyholder who chooses the insurance contract that maximizes her expected utility. We demonstrate that stockholders cannot profitably offer fully participating contracts, but can profitably offer partially participating insurance. However, when the policyholder participation fraction is high, the fair‐return premium is so large that the policyholder always prefers fully participating insurance from the mutual company. Policies with lower levels of policyholder participation are optimal for policyholders with relatively high risk aversion, though such policies are usually prohibited by insurance legislation. Thus, the reason stock insurers rarely issue participating contracts isn't because the potential benefits are small or unimportant. Rather, profitability or regulatory constraints simply prevent stock insurers from exercising those benefits in equilibrium.     

Implicit Options in Life Insurance: Valuation and Risk Management

Participating life insurance contracts typically contain various types of implicit options. These implicit options can be very valuable and can thus represent a significant risk to insurance companies if they practice insufficient risk management. Options become especially risky through interaction with other options included in the contracts, which makes their evaluation even more complex. This article provides a comprehensive overview and classification of implicit options in participating life insurance contracts and discusses the relevant literature. It points out the potential problems particularly associated with the valuation of rights to early exercise due to policyholder exercise behavior. The risk potential of the interaction of implicit options is illustrated with numerical examples by means of a life insurance contract that includes common implicit options, i.e., a guaranteed interest rate, stochastic annual surplus participation, and paid-up and resumption options. Valuation is conducted using risk-neutral valuation, a concept that implicitly assumes the implementation of risk management measures such as hedging strategies.     

Online-Aktivität als moderierender Effekt der Wirkung Convenience instrumentalisierender Attribute auf Kundengewinnung im Versicherungsneugeschäft

Digitization’s increasing influence on the Germans’ everyday lives leads to changes in their buying behavior. In the internet age, customer orientation means, inter alia, to actually understand the changes in the consumers’ expectations. This raises the question how the shift of customer activity from the analogue to the digital world changes the effect of certain exogenous, convenience exploiting attributes on a supplier’s predefined response variables (e.?g. customer acquisition). This article focuses on the insurance industry and, theoretically, deals with the question, whether doing business online can be considered as moderating effect of the relationship between convenience attributes (controllable by insurers) and customer acquisition as target figure in insurance business. Based on the example of contracting a new motor insurance policy it can be derived hypothetically that “digital customers” have different expectations in terms of speed of processing (as convenience attribute) than those signing a policy together with their agent.     

The Demand for Insurance With an Upper Limit on Coverage

The demand for insurance is examined when the indemnity schedule is subject to an upper limit. The optimal contract is shown to display full insurance above a deductible up to the cap. Some results derived in the standard model with no upper limit on coverage turn out to be invalid; the optimal deductible of an actuarially fair policy is positive and insurance may be a normal good under decreasing absolute risk aversion. An increase in the upper limit would induce the policyholder with constant absolute risk aversion to reduce his or her optimal deductible and therefore this would increase the demand for insurance against small losses.     

Ein Regressionsmodell zur sparten- bzw. marktbezogenen Analyse der Eigenkapitalkosten von Unternehmen am Beispiel der Versicherungsbranche

In this paper we present a regression model which is fitted in the cost of equity of stock market companies. In this way we can estimate the cost of equity for companies which are not listed on the stock market based on the weights of line of business and market. Thus the cost of equity used for a value based management of strategic business units can be derived on the basis of these economic parameters. The theoretical model is introduced in a general setting for companies of any industry sectors. Then the model is applied to the insurance sector based on the lines of business Life and Non-life as well as on markets for Germany, Europe and the United States of America.     

The Liability Regime of Insurance Pools and Its Impact on Pricing

This work formally derives fairly priced premiums for the policyholder of an insurance pool and the risk-adequate equity contributions of the pool insurers’ equity holders in a contingent claims approach. The approach distinguishes between two liability regimes: joint liability and several liability. These regimes regulate the pool’s indemnification when one or more of the pool insurers cannot meet their full obligations because of insolvency. Joint liability is deduced to be the preferable regime for the policyholder in cost-savings terms if corporate income taxation is introduced as a market friction. This regime advantage vanishes if the pool insurers’ asset correlation is substantial or if their risk sharing becomes unbalanced. Additionally, we address risk-shifting problems and their regime-dependent effects on both stakeholder groups.     

Die demographische Entwicklung in Deutschland und ihre Bedeutung für das Kapitaldeckungsverfahren von Lebensversicherern,privaten Krankenversicherern und Pensionsfonds

The decline in population will increase dramatically after the year 2030; this development is accompanied by a dramatic change of the social structure of the German society and the aging of the population. Policyholders of annuity contracts who are now in the age of 35 will probably retire in the year 2037 and their death can be actuarially awaited near 2060. That means those people are completely affected by the development after 2030. The annuity contracts with a guaranteed interest rate (legally fixed for the duration of the contracts) dominate the new business of life insurance companies. The period of time of the interest rate guarantee can be up to 40 or 50 years. Our demographic profile leads to the assumption that in 2050 we will miss 15 million people of our working population; this represents the actual figure of the working population of Belgium, Denmark, Finland, Ireland and Austria. Consumption, overall investments and the demand of borrowed funds will decrease. The level of the rate of return of bonds or other interest bearing assets will decline. On the other hand, the value of shares of those companies who belong to the winners of the global transition process we have started right now will increase. Unfortunately life insurance companies and pension funds — when they take investment risk — are forced mainly to invest in bonds or other debentures. The consequence can be a not attractive level of return of the premiums paid. A solution would be to reinforce the development and business of non guaranteed annuities and a higher quote of shares in the portfolios. Then it would be the duty of each policyholder to protect himself by diversification     

我国保险公司诚信体系建设的博弈分析

我国保险业处于诚信严重缺失的状况,解决诚信问题需要把握保险公司的经营目标。本文从博弈论的视角分析了保险市场中竞争状况和由于竞争导致诚信缺失的原因。现阶段保险公司亟需监管部门给予有效指引,使竞争机制能够对保险业诚信产生有利导向。我国可以通过建立顾客满意度测评体系、完善保险公司投诉制度、加强保险公司诚信监管等手段来促进我国保险公司诚信体系的建设。     

Immediate Annuity Pricing in the Presence of Unobserved Heterogeneity

Abstract

One of the acknowledged difficulties with pricing immediate annuities is that underwriting the annuitantis life is the exception rather than the rule. In the absence of underwriting, the price paid for a life-contingent annuity is the same for all sales at a given age. This exposes the market (insurance company and potential policyholder alike) to antiselection. The insurance company worries that only the healthiest people choose a life-contingent annuity and therefore adjust mortality accordingly. The potential policyholders worry that they are not being compensated for their relatively poor health and choose not to purchase what would otherwise be a very beneficial product.

This paper develops a model of underlying, unobserved health. Health is a state variable that follows a first-order Markov process. An individual reaches the state “death” either by accident from any health state or by progressively declining health state. Health state is one-dimensional, in the sense that health can either “improve” or “deteriorate” by moving farther from or close to the “death” state, respectively. The probability of death in a given year is a function of health state, not of age. Therefore, in this model a person is exactly as old as he or she feels.

I first demonstrate that a multistate, ageless Markov model can match the mortality patterns in the common annuity mortality tables. The model is extended to consider several types of mortality improvements: permanent through decreasing probability of deteriorating health, temporary through improved distribution of initial health state, and plateau through the effects of past health improvements.

I then construct an economic model of optimal policyholder behavior, assuming that the policyholder either knows his or her health state or has some limited information. the value of mortality risk transfer through purchasing a life-contingent annuity is estimated for each health state under various risk-aversion parameters. Given the economic model for optimal purchasing of annuities, the value of underwriting (limited information about policyholder health state) is demonstrated.     

Kundenbindung in der Versicherungswirtschaft: Ergebnisse einer theoretischen und empirischen Analyse

In this article customer retention is analysed both theoretically and empirically, especially the retention of customer to insurance intermediaries. After the construct of customer retention has been conceptualised, the determinants of customer retention in the insurance business are derived. The empirical analysis is based on interviews of German customers of an internationaly operating financial services company. A total of 1,003 interviews were conducted. The analysis of customer retention through the usage of structural equation modelling forms the main part of this article. A comparison of three methods — structural equation modelling, neural networks and decision trees — shows that they are complementary and a combined application of these methods brings additional insights. On the basis of the determinants of customer retention, a typology of customers is built through hierarchical cluster analysis. The management of customer retention can be realised either by manipulating the determinants of customer retention or by ad dressing the identified customer types with a segment specific marketing mix.     

Manage marketing by the customer equity test

Managers have recently begun to think of good marketing as good conversation, as a process of drawing customers into progressively more satisfying relationships with a company. And just as the art of conversation follows two steps--first striking up a conversation with a likely partner and then maintaining the flow--so the new marketing naturally divides itself into the work of customer acquisition and the work of customer retention. But how can managers determine the optimal balance between spending on acquisition and spending on retention? Robert Blattberg and John Deighton use decision calculus to help managers answer that question. That is, they ask managers to approach the large, complex problem through several smaller, more manageable questions on the same topic. Then they use a formal model to turn those smaller judgments into an answer to the larger question. The ultimate goal, the authors say, is to grow the company's customer equity the sum of all the conversations-to its fullest potential. Recognizing that managers must constantly reassess the spending points determined by the decision-calculus model, the authors also provide a series of guidelines and suggestions to help frame the issues that affect acquisition, retention, and customer equity. When managers strive to grow customer equity rather than a brand's sales or profits, they put a primary indicator of the health of the business at the fore front of their strategic thinking: the quality of customer relationships.     

Wer trägt das Terrorrisiko?

This article deals with insuring terrorism risks and it focuses on the situation in Germany after the events of September 11^th 2001. After a brief introduction to the general problems of insuring against terrorism the authors explore how terrorism affects different lines of insurance business in Germany and examine Extremus, the German specialist insurer with government backing for insuring property risks against terrorism. A thorough analysis of different aspects of risk transfer follows. This analysis also addresses different pricing strategies for insuring against terrorism. In this section the authors focus on the question to what extend one can really speak of a risk transfer through insurance in respect to terrorism. Scenarios are developed of how large losses would affect the insurance industry as well as the customers. In regard to those scenarios it becomes visible that the risk transfer from the policyholder to the insurer is not complete.In their conclusion the authors examine some scenarios of increased and decreased terrorist activity and the effects that each of these scenarios will have on the solution of insuring against terrorism through Extremus.     

Comparison of Stakeholder Perspectives on Current Regulatory and Reporting Reforms

In the European insurance industry, regulatory and reporting frameworks are currently subject to far-reaching reforms. We focus on four of these frameworks, namely the Solvency II framework, insurance guaranty systems, the proposed IFRS 4 Phase II international accounting standards, and Market Consistent Embedded Value reporting. We present these frameworks, analyze them from the insurance company's management, investors, and policyholder perspectives, and compare them. Our analysis implies that the four frameworks need to be considered jointly, due to various interrelations and interactions. We argue that a coordinated introduction will be necessary to ensure that the regulatory burden is reduced and synergies can be utilized in the event of all four frameworks being implemented as planned. Furthermore, we analyze the challenges of a holistic, comprehensive approach to insurance reporting and regulation and its implementation in order to achieve the goals set by the frameworks.