infonet-economy

Participating life insurance contracts are one of the most important products in the European
life insurance market. These kind of contracts are characterized by a cliquet-style minimum interest
rate guarantee and bonus participation rules with regard to the insurer's return. Even though these
contract forms are very common, only very little research has been conducted in respect to their per-
formance. Hence, we conduct a performance analysis to provide a decision support for policyholders.
We decompose a participating life insurance contract in a term life insurance and a savings part and
simulate the cash flow distribution of the latter. We compare the simulation result with cash flows
resulting from a benchmark investing into the same portfolio but without investment guarantee and
bonus distribution scheme in order to measure the impact of these two product features. To provide
a realistic picture within the two alternatives, we take transaction costs and distribution effects be-
tween policyholders into account. We show how the payoff distribution depends heavily on the initial
reserve situation and management's discretion. Thus, the expected performance is in general difficult
to assess for policyholders.