Competition among Life Insurance Companies: The Driving Force of High Policy Rates?,” Working Paper

We analyze the effect competition has on the decisions of life insurance companies. In particular, we are interested in the companies ’ choices of policy rates and investment strategies given that they have issued contracts with a minimum rate of return guarantee. Our modeling framework is a one-period Cournot model of duopoly. We find policy rates and investment strategies that sustain a Nash equilibrium. We compare the results to the cooperative solution, that is, the case where the companies operate as a monopoly company and share the profits. Our model illustrates how competition between companies drives companies to offer relatively high policy rates, in particular rates above the risk free rate of return. Special thanks to Peter Ove Christensen and Kristian Miltersen. Claus Munk, and Martin Skovgaard Hansen were highly appreciated.