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The bonus-crediting mechanism of Danish pension and life insurance companies: an empirical analysis

Published online by Cambridge University Press:  08 January 2003

ANDERS GROSEN  and
PETER LØCHTE JØRGENSEN
ANDERS GROSEN
Affiliation:
Department of Finance, Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Århus V, Denmark (Tel: +45 89 48 64 27. Fax +45 86 15 19 43. e-mail: gro@asb.dk
PETER LØCHTE JØRGENSEN
Affiliation:
Department of Management, University of Aarhus, University Park 322, DK-8000 Aarhus C, Denmark (Tel: +45 89 42 15 44. Fax +45 86 13 51 32. e-mail: ecolochte@econ.au.dk
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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.

Type
Research Article
Information
Journal of Pension Economics & Finance , Volume 1 , Issue 3 , November 2002 , pp. 249 - 268
Copyright
© 2002 Cambridge University Press

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Footnotes

This paper has benefitted greatly from the suggestions and comments of Mike Orszag (the editor), two anonymous referees, Niels Haldrup, Montserrat Guillén and from participants at the International Symposium on Insurance and Finance in Bergen, Norway, in April 2002, and at the Conference on The Interplay between Mathematical Finance and Insurance in Aarhus, Denmark, in June 2002. We are also very grateful to Bent Jesper Christensen and Niels Haldrup for pointing us to the literature on Tobit model estimation. A large part of this paper was written while the second author was visiting Universitat Pompeu Fabra, Barcelona, Spain. Peter Løchte Jørgensen wishes to thank the UPF for hosting him and for placing their facilities at his disposal.