Investment Guarantees in Unit-linked Life Insurance Products : Comparing Cost and Performance

In this article we identify risk and return profiles of two types of investment guaranteesin unit-linked life insurance products: an interest rate guarantee and a lookbackguarantee. This is done by comparing guarantee costs and performance for thematurity payoff and by testing the investment alternatives with respect to first, second,and third order stochastic dominance. In addition, we analyze the impact ofthe underlying fund’s strategies by comparing results for a conventional fund havingaverage rate of return and standard deviation over the contract term with a ConstantProportion Portfolio Insurance managed fund. We compare empirical resultsfor different μ-σ-efficient diversified portfolios based on stock, bond, real estate,and money market indices. The aim of our investigation is to show the interactionbetween guarantee costs, underlying fund strategies, and payoff distributions atmaturity.