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Zeitschrift für die gesamte Versicherungswissenschaft
Erschienen in: Zeitschrift für die gesamte Versicherungswissenschaft 5/2013

01.12.2013 | Abhandlung

The market of dynamic hybrid products in Germany: concept, risk-return profiles, and market overview

verfasst von: Alexander Bohnert

Erschienen in: Zeitschrift für die gesamte Versicherungswissenschaft | Ausgabe 5/2013

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Abstract

This article analyzes dynamic hybrid products along with their diverse characteristics and contract variations that are currently available in the German market. Dynamic hybrid products are innovative life insurance contracts combining features of traditional participating life insurance with those of unit-linked policies. This approach is thereby implemented by a mathematical algorithm based on a constant proportion portfolio insurance strategy that periodically reallocates funds (e.g. once per month or day) between the policy reserve stock (with an interest rate guarantee), a guarantee fund and/or equity fund. In this paper, we contribute to the literature by examining the concepts and key features of available dynamic hybrid products with particular focus on the embedded options, which allows the identification of key contract characteristics associated with them. In addition, risk-return profiles are studied and compared, which is of high relevance for regulators and policyholders. Our results show that these strongly vary, depending on the individual rebalancing mechanism and the type and amount of embedded options.
Vorheriger Artikel An econometric analysis of the demand surge effect
Nächster Artikel Computerised detection and stochastic forecast of age, period and cohort effects

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Fußnoten
1
See Gatzert and Schmeiser (2013).
 
2
See, e.g., Ortmann and Pfeifer (2010), and Fig. 1 in the subsequent section.
 
3
See, e.g., Daalmann (2012), and Salzgeber and Steurer (2012).
 
4
See Grossman and Vila (1989) for the formal definition of a portfolio insurance strategy.
 
5
This was first discussed in 1976, see Leland and Rubinstein (1988) and Zagst and Kraus (2011).
 
6
The concept of a CPPI for fixed income securities was first addressed by Perold (1986) and it is introduced by Black and Jones (1987) for equity investments.
 
7
The guaranteed interest rate represents a fixed rate, which is at least paid on funds in the policy reserves.
 
8
A CPPI strategy invests funds in a pro-cyclical way and might lead to a cash-lock, i.e. all funds have to be invested risk-free in order to achieve the guarantee. In contrast to this, there are modifications of a standard CPPI that adjust the parameters according to the current market environment (see Salzgeber and Steurer 2012).
 
9
Static hybrid products were introduced in 1999 as the first hybrid products in Germany (see, e.g., Kochanski and Karnarski 2011) and they are referred to as hybrid products of the first generation (see Witte 2010).
 
10
To be precise, the premium is split into four parts, namely investments in the traditional policy and an equity fund as stated above and in addition to this costs have to be covered as well as a premium snippet has to be paid for a term life insurance to cover the case of death. In further explanations, we will ignore the latter two premium snippets and focus on the two investment parts.
 
11
Here, the guarantee is ensured by the policy reserve stock only, i.e. the equity investments’ value could drop to zero in the worst case.
 
12
See Kochanski and Karnarski (2011).
 
13
Here, the guarantee is provided by the policy reserve stock and the fund investment, which is assumed to fall in the worst case by λ percent in one period. Furthermore, a 2-fund dynamic hybrid product with an investment in the policy reserve stock and an equity fund resembles an individual CPPI strategy.
 
14
One the one hand, a high upside potential is enabled through a maximum investment of the account value in risky funds, while still ensuring the guarantees, but on the other hand this implies numerous shiftings, and thus transaction costs, and this strategy acts pro-cyclical. There are different mechanisms that aim to balance this tradeoff, which are referred to dynamic hybrid products of the fourth generation (see Witte 2010).
 
15
Here, contracts are available as a so-called basic pension or “Rürup” pension, as a government-subsidized contract called “Riester”, and as private pension plans.
 
16
See also Ortmann and Pfeifer (2010).
 
17
In 2011, there are a total number 94 life insurance companies in Germany and their share in the total premium income in the sector of primary insurance amounts to 48.7 % (see GDV 2012, Table 1).
 
18
The list is mainly based on information that is available through the insurers’ websites and it is assembled with the aim to provide a comprehensive market overview, as to our knowledge, it covers most of the market.
 
19
A “Rürup” pension plan is subject to tax deferral, i.e. in the accumulation phase, premiums are paid prior to taxation and annuity payments are taxed in the payout phase (currently, premiums as well as annuity payments are partly taxed in the transition period until 2040). Contracts have to fulfill certain criteria to be eligible as a “Rürup” pension, inter alia, annuitization in the payout phase is mandatory. These kinds of products are mainly intended for self-employed persons to cover the gap between state-run and private pensions.
 
20
A “Riester” pension plan is subsidized by the government, which contributes to the contract by additional payments and tax benefits. To qualify as such a contract, policies must have, inter alia, a money-back guarantee. At the end of the accumulation phase, 30 % of the contract value is allowed to be paid out as a lump-sum payment, while the remainder has to be annuitized.
 
22
This system is called “ISS” or “Intelligent Shift-System” (see VPV 2013).
 
23
One guarantee fund focuses on more risky investments and allows a 20 % loss within one month at most, and the other guarantee fund invests less risky and ensures 90 % of its value at the end of the month, i.e. it allows a drop of 10 % in value per month at most. The guarantees are ensured via a CPPI strategy and the two guarantee funds are funds of funds, which are composed of investments selected by the insurer (see VPV 2013; Ortmann 2010).
 
24
This system is called “WWK IntelliProtect” (see WWK 2013).
 
25
This system called “ISS” or “Intelligent Shift-System” thereby selects index funds out of a fund universe with more than 100 funds (see VPV 2013).
 
26
Hence, investments that performed well in the last period are sold, i.e. gains are realized, whereas assets that have underperformed are bought again leading to a counter-cyclical strategy (see Ortmann 2009).
 
27
New capital refers to future premium payments as well as money from the policy reserve stock (and guarantee fund in case of a 3-fund dynamic hybrid system), which is allocated to the fund investments in the future.
 
28
Note that there is a maximum number of funds that can be kept in a policyholder’s portfolio at the same time.
 
29
To qualify for a government-subsidized Riester pension plan, the paid-in premiums have to be available at the end of the accumulation phase (money-back guarantee) (see German Federal Ministry of Justice 2001).
 
30
This guarantee also accounts for additional payments minus payoffs (possible in most contracts) during the contract term.
 
31
The choice of the minimum payoff guarantee influences the investment strategy’s riskiness.
 
32
Note that in extremis, i.e. without any guarantee or with a money-back guarantee plus an annual interest rate equal to the minimum interest rate guarantee of the policy reserve stock, the contract leads to a pure unit-linked policy and a traditional contract, respectively. In the first case, funds would solely be invested in the equity fund class, whereas for the latter, funds would fully be put in the policy reserve stock as done in a traditional life insurance.
 
33
In addition to a money-back guarantee, VPV offers a 110 % guarantee on the paid-in premiums, for which the contract term has to be 17 years at least (see VPV 2013).
 
34
For a contract with a single premium, this might be a possibility to escape from a situation comparable to a cash-lock position.
 
35
This depends on the type of contract. In case of a basic contract (“Rürup”), the annuitization is mandatory, whereas for a government-subsidized “Riester” contract, 30 % of the contract value can be paid out as a lump-sum payment.
 
36
Note that the payout phase cannot begin before the age of 60 for a Riester contract (see German Federal Ministry of Justice 2001).
 
37
To apply an expiry management might not be beneficial per se and policyholders should choose the option depending on the market situation, since the expiry managements do typically not consider current market conditions (bear/bull market) and shift funds from risky assets to low-risk assets according to a fixed mechanism that generates a loss at a disadvantageous point in time (see, e.g., Witte 2009).
 
38
Assumptions have to be specified based on an evidence of financial viability (“Finanzierbarkeitsnachweis”).
 
39
See Gatzert (2013) for a study of the impact of different premium payment schemes on the performance of unit-linked contracts, which can vary considerably depending on the premium type already despite the same present values and keeping all other contract parameters unchanged.
 
40
While risk-return profiles allow a comparison of various dynamic hybrid products, it also enables a comparison to different unit-linked policies or other innovative life insurance contracts such as equity-indexed annuities (e.g. the “PrivatRente IndexInvest” by R+V, see www.​ruv.​de).
 
42
Volatium profiles are available for about one third of the considered insurers in Table 1.
 
43
Profiles of the corresponding government-subsidized versions of the contracts (“Riester”) are virtually identical to those shown here.
 
44
Company-specific information is used to derive estimates for the interest rates (including surplus participation) that are paid on funds in the policy reserve stocks of the corresponding companies. A recent comparison of the interest rates for the policy reserve stocks generated by German life insurers can be found in Hinterberger (2013).
 
45
In case of a mechanism according to Eq. (3), the maximum proportion of the account value is invested in the equity fund (and guarantee fund), while still ensuring the guarantee. This implies that only two out of the three funds are filled at the same time.
 
46
In case of product 3, there is no risk-return profile for another contract version available besides the standard contract.
 
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Metadaten
Titel
The market of dynamic hybrid products in Germany: concept, risk-return profiles, and market overview
verfasst von
Alexander Bohnert
Publikationsdatum
01.12.2013
Verlag
Springer Berlin Heidelberg
Erschienen in
Zeitschrift für die gesamte Versicherungswissenschaft / Ausgabe 5/2013
Print ISSN: 0044-2585
Elektronische ISSN: 1865-9748
DOI
https://doi.org/10.1007/s12297-013-0250-6

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