Participating Payout Life Annuities: Lessons From Germany

Abstract

This paper analyzes the framework of German participating payout life annuities (PLAs), which offer guaranteed minimum benefits as well as participation in insurers' surpluses. We show that the process of sharing surpluses between shareholders and policyholders follows transparent and consistent rules. Subsequently, we develop an asset-liability model for a stylized German life insurer that offers PLAs to evaluate benefit variability and insurer stability given stochastic mortality and capital market developments. Our results suggest that guaranteed benefits can be provided with high credibility via PLAs, while, at the same time, annuitants receive attractive money's worth ratios. Moreover, we show that it might be difficult to offer a fixed benefit annuity providing the same lifetime utility as a PLA for the same premium and a comparably low insolvency risk. Overall, PLA schemes may be an efficient way to deal with risk factors that are highly unpredictable and difficult to hedge over the long run, such as systematic longevity and investment risks.

Measuring Risk-Adjusted Performance and Product Attractiveness of a Life Annuity Portfolio

“…From these general observations, participating life annuity structures are different from country to country and they can even differ among insurance companies of the same country. Recently [15] analyzes German participating life annuities (PLA) with guaranteed minimum benefits and participation in insurers surpluses; in particular in the paper the Authors investigate the lifetime utility of annuitants buying PLAs, taking into account insolvency risk related to such contracts.…”

“…Likewise for the AROE, the ARG analysis was performed by a simulation procedure for getting the empirical distribution of ARG values for each t, implemented on 10,000 ARG outputs for each value of t. Again in the case of an annuitant aged 65 and the participating quota of 20%, Table 3 shows the values calculated in 0, 5,10,15,20,25,30,35, 40 t = . We report the expected ARG values with the related minimum and maximum and the C-quantiles at 95% and 99%.…”

“…Now, just following this approach, we provide some suggestions concerning the contract proposed in Section 3. As in [15], we consider a CRRA utility function applied to a life annuity with benefit flow defined by (4) and duration of 10 years, issued to an insured aged 65. The utility expected by the benefit stream is given in [26].…”

“…With reference to the numerical example presented in the previous section, we consider three different risk aversion levels, which represent, respectively, low, medium and high risk aversion ( 2,5,10 γ = , respectively) as in [15], together with three values of φ , 0.98, 0.96, 0.94, referred to patient/normal/impatient individuals, respectively. Table 5 provides the utility equivalent annuities (UEAs) calculated in the case of a fixed interest rate 0.02; Table 6 provides the UEAs in the case of stochastic interest rates described by the Vasicek process introduced in section 4.1.…”

Participating life insurance contracts under Solvency II: inheritance effects and allowance for a Going Concern Reserve

“…e. g. [1,10,22,25,26,32,38]). Some papers explicitly focus on the surplus distribution mechanism in Germany [4,7,31,35] and others discuss the valuation under Solvency II [30,34]. However, none of them takes into account the inheritance effects concerning cost surplus which are inherent in traditional German life insurance.…”