The market of dynamic hybrid products in Germany: Concept, risk-return profiles, and market overview

This article analyzes dynamic hybrid products along with their diverse characteristics and contract variations that are currently available in the German market. Dynamic hybrid products are innovative life insurance contracts combining features of traditional participating life insurance with those of unit-linked policies. This approach is thereby implemented by a mathematical algorithm based on a constant proportion portfolio insurance strategy that periodically reallocates funds (e.g. once per month or day) between the policy reserve stock (with an interest rate guarantee), a guarantee fund and/or equity fund. In this paper, we contribute to the literature by examining the concepts and key features of available dynamic hybrid products with particular focus on the embedded options, which allows the identification of key contract characteristics associated with them. In addition, risk-return profiles are studied and compared, which is of high relevance for regulators and policyholders. Our results show that these strongly vary, depending on the individual rebalancing mechanism and the type and amount of embedded options.