Analysis of Embedded Options in Individual Pension Schemes in Germany
Journal
The Geneva risk and insurance review
ISSN
1554-964X
ISSN-Digital
1554-9658
Type
journal article
Date Issued
2006-01-01
Author(s)
Abstract
Newly introduced government-subsidized pension products in Germany are required to contain a promise by the seller to provide a "money-back guarantee" at the end of the term. The client is also given the right to stop paying premiums at any time (paid-up option). In this case, the amount of all premiums paid must also be guaranteed by the seller at maturity, no matter when the client stopped paying the premiums. Previous analyses of guarantees in such government-subsidized pension products have ignored this additional option. Within a generalized Black/Scholes framework, we analyze the value of the paid-up option for different products, market scenarios, and client behavior. Our results indicate that the paid-up option significantly increases the value of the money-back guarantee. Furthermore, we find that reducing volatility by shifting the client's assets from stocks to bonds as maturity approaches is a suitable means of reducing the risk arising from the "pure" money-back guarantee but much less effective in reducing the risk arising from the paid-up option.
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Springer
Publisher place
Norwell, Mass.
Volume
31
Number
1
Start page
43
End page
60
Pages
18
Subject(s)
Division(s)
Eprints ID
20886
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Analysis of Embedded Options in Individual Pension Schemes in Germany.pdf
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