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Due to the continuing low interest rate environment as well as the increase in acquisition costs, price transparency, cost transparency and competition with banks, the cost of life insurance becomes increasingly important for customers, insurers and shareholders. Against this background, the purpose of this paper is to study the development of insurers’ economies of scale in regard to administrative costs for four of the largest European life insurance markets.

The analysis on economies of scale is based on a comprehensive set of 477 life insurers in Germany, Italy, Spain and the UK, yearly data between 2000 and 2014, and regression calculations that are based on 4,855 observations.

The results show that economies of scale exist for all considered markets and for most of the considered years. However, the extent of economies of scale varies considerably across countries.

Overall, the existing academic literature on costs and corresponding economies of scale in life insurance primarily deals with analyses of total costs instead of administrative costs, a single year or a single market. This paper contributes to the existing literature by conducting an analysis of recent market dynamics and economies of scale in regard to administrative costs for the period from 2000 and 2014 for four of the largest European life insurance markets for which the respective data were available (Germany, Italy, Spain and the UK) and 477 life insurers in total. This is done by means of a log-log transformation of premiums and costs and a fixed effects model based on these transformed figures for 4,855 observations. In addition, for each market, the authors analyze the development of administrative costs for a total of 477 insurers.

The purpose of this paper is to show how an insurance company can maximize the policyholder’s utility by setting the level of the interest rate guarantee in line with his preferences.

The authors develop a general model of life insurance, taking stochastic interest rates, early default and regular premium payments into account. Furthermore, the authors assume that equity holders must receive risk-adequate returns on their initial equity contribution and that the insurance company has to maintain a solvency restriction.

The findings show that the optimal level for the interest rate guarantee is in general far below the maximum value typically set by the supervisory authorities and insurance companies.

The authors conclude that the approach of deviating from the maximum interest rate guarantee level given by the regulatory requirements can create additional value for the rational policyholder. In contrast to Schmeiser and Wagner (2014), the second finding shows that the interest rate guarantee embedded in a life insurance product becomes less attractive compared to a pure investment in the underlying asset portfolio to the policyholder when the guarantee level is lowered too far or the contract duration is short. They also refute Schmeiser and Wagner (2014) by showing that the equity capital required by the insurance company increases with the level of the guarantee, even if the insurer is flexible with respect to its asset allocation. The last finding is that a policyholder with higher risk aversion does not generally prefer a higher guarantee level.

In financial planning, customers are typically confronted with choosing a premium payment scheme when investing in a mutual fund, which is often equipped with an investment guarantee to provide downside protection. Guarantee costs may thereby also be charged differently depending on the provider. The paper aims to investigate the impact of the premium payment method on different performance measures for a mutual fund with an investment guarantee.

The paper compares a fund with annual and upfront premiums as well as constant guarantee costs versus the guarantee price as an annual percentage fee of the fund value, always ensuring that the present value of premium payments is the same for all product variants. The paper further studies the relevance of the guarantee level and the contract term.

The results emphasize that even though the present value of premiums paid into the contract is the same, the type of premium (upfront versus annual) as well as the type of guarantee cost (upfront versus annual fee) has a considerable impact on the performance.

Providers can thus make a product more attractive for consumers by individually adjusting the premium scheme depending on their preferences and by making the resulting risk-return-profile transparent, while keeping the other contract characteristics unchanged (e.g. extent of the guarantee).

To date, there has been no comprehensive analysis with specific focus on the impact of different premium payment schemes (in particular with respect to savings premiums and guarantee costs) on risk and return of a mutual fund with otherwise given contract characteristics such as the underlying fund strategy and the investment guarantee, even though the premium scheme itself can already have a considerable impact on the terminal payoff distribution and thus risk-return profiles. In addition, such an analysis can provide important information for consumers and providers in designing and choosing attractive products by simply adjusting the premium scheme (if possible) instead of or in addition to changing other product features.