Investors with preferences based on prospect theory may choose different investment strategies due to their perception of rare market events. We revisit research on preferences for financial guarantees offered by US life insurers to show how the appeal of registered index-linked annuities (RILAs) to such investors depends on their subjective evaluation of rare but extreme events. We further show that our model offers an explanation for the growing popularity of this new guarantee, but also accurately captures sales patterns across different types of RILAs. Our results suggest that life insurers create value for retail investors by tailoring financial guarantees to their behavioral preferences.
Language
English
Keywords
Registered Index-Linked Annuities
Cumulative Prospect Theory
Behavioral Insurance Demand
Investor Beliefs
Salience Theory
Threshold Level of Concern D01
D81
G22
G41
HSG Classification
contribution to scientific community
HSG Profile Area
None
Event Title
Annual Meeting - American Risk and Insurance Association