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This thesis examines the issue of subsidization and returns in a mutual life insurance company in run-off, where policyholders share both profits and risks. The thesis analyzes how different portfolio structures, investment strategies, and market scenarios affect the various generations in the company and which approach provides the fairest outcome for all generations. Through the use of market consistent scenarios, calibrated by minimizing the difference between model prices and market prices, different strategies are analyzed, CPPI (Constant Proportion Portfolio Insurance), CM (Constant Mix), and Target Date Funds (TDF). The study was conducted to examine and value subsidization between generations, to find a fair portfolio structure for all policyholders. The study compared a shared portfolio for all individuals, and generation portfolios, where each generation has a portfolio of their own. The results indicate that the shared portfolio has the potential to generate better returns than the generation portfolios and the valuation of subsidies reveals that subsidies are minimal with the shared portfolio. Further, we compared two different methods of distribution portfolio returns. The first method gives each individual the portfolio return, while the other distributes the return according to each individuals ratio between their total capital and the present value of future payouts. The latter method drastically increases the stability of the insurance company, and in the case of a shared portfolio it practically eliminates the need for subsidies. We conclude that the majority of insurance takers maximizes their returns and minimizes subsidies with shared constant mix portfolios with individualized returns. |
