Minimum rate of return guarantees: A valuation for customers with habit formation in preferences

  • Firmin Bijl Firmin Bijl

This paper constructs two mathematical models in order to determine whether investing in a minimum rate of return guarantee is welfare improving for customers with habit formation in preferences. The value
of the minimum rate of return guarantee is determined by comparing the simulation results of two models.
The first model determines the welfare for a customer when a minimum rate of return guarantee is unavailable, while the second model finds the welfare when a minimum rate of return guarantee is introduced. Using a measure called the certainty equivalent surplus consumption, we find that these guarantees are an interesting investment strategy for customers with and without habit formation in preferences. However, the welfare improvement is dependent on the specific contracts and the different settings that are considered.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

MORE ABOUT NETSPAR


Mission en strategy           •           Network           •           Organisation           •          Magazine
Board Brief            •            Actionplan 2019-2023           •           Researchagenda

ABOUT NETSPAR

Our partners

B20220412_SPIN_logo+naam_2xPMS_2_voettekst
B20160708_universiteit leiden
B20160708_asr
BPL_Pensioen_logo+pay-off - 1610-1225 v1.1_grijswaarden
B20220329_sph huisartsen
View all partners