Financial Products with Guarantees: Applications, Models and Internet-based services

Endowments with a minimum guaranteed rate of return appear in insurance policies, pension plans and social security plans. In several cases, especially in the insurance industry, such endowments also participate in the business and receive bonuses from the firm's asset portfolio. In this paper we develop a scenario based stochastic optimization model for asset and liability management of participating insurance policies with minimum guarantees. The model allows the analysis of the tradeoffs facing an insurance firm in structuring its policies as well as the choices in covering their cost. The model is applied to the analysis of policies offered by insurance firms in Italy and the UK. While the optimized model results are in general agreement with current industry practices, inefficiencies are still identified and potential improvements are suggested. The modeling tools developed for the management of insurance policies are also used to develop a web-based system for individual investors. Investor’s goals and risk profiles are addressed in an integrated fashion. The requirements for real-time modeling by the average investor must be reflected in the model, and this issue will be discussed as well. The practical experience with this model will be discussed.