The Bonus-Crediting Mechanism of Danish Pension and Life Insurance Companies: An Empirical Analysis

Abstract

This paper develops and estimates a model for the bonus-crediting mechanism in relation to with-profits policies issued by Danish life insurance and pension companies. The market for pension and life insurance savings contracts is generally highly opaque, but our proposed model explains a significant part of the variation in actual bonus distribution by Danish market participants. The main determinant of bonus policy is a measure of the degree of solvency which we construct from a unique data set that contains information compiled from several public as well as non-public sources. The data set spans the ten-year period from 1991 to 2000 and the model is estimated by way of maximum likelihood.