Participating Payout Life Annuities: Lessons from Germany

Abstract

This paper analyzes the regulatory framework of German immediate participating payout life annuities (PLAs), which offer guaranteed minimum benefits as well as participation in insurers' surpluses. Our particular focus lies on the mechanics of sharing surpluses between shareholders and policyholders. We show that the process of surplus determination, allocation, and distribution mostly follows transparent and clear rules, and that an insurance company's management has limited leeway with respect to discretionary decision making. Subsequently, we develop an Asset Liability Model for a German life insurer that offers PLAs. Based on this model, we run Monte Carlo simulations to evaluate benefit variability and insurer stability under stochastic mortality and capital market developments. Our results suggest that through PLAs guaranteed benefits can be provided with high credibility, 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, participating life annuity 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 mortality and investment risks.

Accounting-Based Asset Return Smoothing in Participating Life Annuities: Implications for Annuitants, Insurers, and Policymakers

“…This chapter outlines the conditions under which smoothing can be beneficial for policyholders who hold with-profit or participating payout life annuities (PLAs). These are bought by retirees expecting to receive a guaranteed benefit for life, along with variable non-guaranteed payments that depend on investment returns and mortality experiences of the insurance pool (Maurer et al 2013b). Our objective is to show how accounting smoothing affects the risk and return profiles of PLA payouts as well as insurer profitability.…”

“…We then convert the expected lifetime utility from the PLA benefit stream into a utility-equivalent fixed life annuity (following Maurer et al 2013b). This can be thought of as the constant guaranteed lifetime income stream which will make the policyholder indifferent to the upside potential of a PLA with stochastic surpluses.…”

“…Here we concentrate only on the liquidation phase of the product. In the European market, participating life annuity products are also on offer, comparable to the TIAA product outlined in the text; see Maurer et al (2013b). …”

The Impact of Guarantees on the Performance of Pension Saving Schemes: Insights from the Literature

“…Policyholders evaluate guarantees, e.g., based on individual risk preferences, i.e., the willingness-to-pay for a contract and a certain guarantee can be derived through expected utility theory, or empirically by the use of surveys (see Gatzert and Schmeiser [20]). This forms another stream of literature that focuses on the willingness-to-pay for guarantees in life insurance comprising studies, amongst others, by Broeders, Chen, and Koos [21], Gatzert, Huber, and Schmeiser [22], Gatzert, Holzmüller, and Schmeiser [23], Maurer, Rogalla, and Siegelin [24], and Bohnert, Born, and Gatzert [25]. As illustrated in Gatzert and Schmeiser [20], a guarantee's risk-neutral value (lower limit) and the consumers' willingness-to-pay for such a guarantee (upper limit) form a premium agreement range for a market premium.…”

Optimal Asset Allocation for Interconnected Life Insurers in the Low Interest Rate Environment Under Solvency Regulation

“…For the insurer's stock holdings, I assume a normally distributed rate of return r S with mean µ S and standard deviation σ S , that is 19 A similar approach is used in Maurer et al (2013). 20 In other words, r…”