9th Symposium on Finance, Banking, and Insurance
Universität Karlsruhe (TH), Germany, December 11 - 13, 2002

Abstract

Competitiveness of Endowment Assurance under Consideration of Risk and Return

Heinrich R. Schradin

Universität zu Köln

The Portefeuille of life-insurers in Germany consists mainly of endowment assurance. However, new business developments show evidence for a decreasing importance of these contracts. This is due to increasing competition not only from the insurance but also from the banking industry. Furthermore, the expectations on return in long binding contracts like life insurance have increased within the last years.

Life-insurers along with their sales force are struggling to put on view the reasons for the seeming disadvantages in return. In order to set up a more persuasive argumentation, it is central to develop metrics that evaluate life insurance contracts on risk and return (redemption yield). Until now, neither insurers nor insurance academics have agreed on a common approach in evaluating life insurance contracts. Thus, it is the author’s objective to illustrate calculations that are capable to display the risk and return profile of life insurance contracts.

The author strives to go beyond a verbal explanation of the benefits in endowment assurance by establishing a model that is able to display a framework for generally applicable risk and return calculations. Further, the model is not limited to calculations on endowment assurance. It can also be applied to general risk and return calculations on alternative offers of the life insurance industry.

Practical applications of the model present evidence for performing characteristics of endowment assurance. Beyond that, the model is able to show signs for further product development to make life insurance contracts competitive and profitable products.