Portfolio Optimization with Illiquid Life Insurance Investments

36 Pages Posted: 1 Nov 2014 Last revised: 5 Mar 2016

See all articles by Ruth Kümmerle

Ruth Kümmerle

WHU - Otto Beisheim School of Management

Markus Rudolf

WHU Otto Beisheim Graduate School of Management

Date Written: March 01, 2016

Abstract

Endowment life insurance products contain a collective component resulting in smoothed returns. By unsmoothing the data of German life insurers we are able to extract the risk/return pattern of the underlying financial assets. Thus, we can analyze mean-variance optimal portfolios including a smoothed with-profit contract compared to an unsmoothed unit-linked contract. We find that life insurance is attractive for conservative investors and cannot be easily replicated. Furthermore the investor cannot regain his expected utility when being allocated to an undesirable amount of the illiquid with-profit contract -- neither through reallocation of his liquid investments nor through collateral lending. Overall, the with-profit contract shows similar characteristics than other illiquid assets. The main difference is that the regulation by law allows the investor to participate in the smoothed returns -- contrarily to all other financial market products where the investor shall participate in his holding period returns.

Note: First version: October 30, 2014

Keywords: asset allocation, portfolio optimization, illiquid investments, life insurance

JEL Classification: G11

Suggested Citation

Kümmerle, Ruth and Rudolf, Markus, Portfolio Optimization with Illiquid Life Insurance Investments (March 01, 2016). Available at SSRN: https://ssrn.com/abstract=2501334 or http://dx.doi.org/10.2139/ssrn.2501334

Ruth Kümmerle (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Markus Rudolf

WHU Otto Beisheim Graduate School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49-(0)261-6509-420 (Phone)

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