infonet-economy

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, i.e., the guaranteed interest rate and the annual and terminal surplus
participation rate. The aim of this paper 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. Our
results suggest that it would be very worthwhile for insurance companies to engage
in customer segmentation based on the different ways customers evaluate life insurance contracts and embedded investment guarantees as doing so could result in
substantial increases in policyholder willingness to pay.