A performance analysis of participating life insurance contracts

Participating life insurance contracts are one of the most important products in the European life insurance market. Even though these contract forms are very common, only very little research has been conducted in respect to their performance. 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. Simulation results are compared with cash flows resulting from two benchmarks investing in the same portfolio of assets but without investment guarantees and bonus distribution schemes, 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 wealth transfers between different groups of policyholders into account. We show that the payoff distribution strongly depends on the initial reserve situation and managerial discretion. Results indicate that policyholders will in general profit from a better payoff distribution of the participating life insurance compared to a mutual fund benchmark but not compared to an exchange-traded fund benchmark portfolio.