International Comparison of Interest Rate Guarantees in Life Insurance Contracts

Minimum interest rate guarantees are included in life insurance products in most countries, but the exact implementations of the guarantees vary significantly across countries. In this paper we develop models of interest rate guarantees in Denmark, Germany, Norway, the U.K., and the U.S. by constructing contracts designed to capture practices in each country. The European contracts include rather sophisticated investment surplus distribution mechanisms, whereas the U.S. contracts are simpler and do not involve an explicit bonus account. The models are compared empirically using simulation analysis. For low volatilities, the payoffs from the Danish, German and U.K. contracts are surprisingly similar to the payoff from the market index. However, for higher levels of volatility the contracts noticeably truncate the lower tail of the index return distribution. The U.S. and Norwegian contracts offer the lowest risk of all contracts but also have the lowest expected returns. Thus, investors in life insurance products encounter significantly different risk-return profiles depending on country of origin