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INTRODUCTION
Most life insurance products are designed for the long term. Such products are usually paid out to the insured or the insured's beneficiaries many years or even decades after the original insurance contract is entered into. Thus, the issue of ensuring long-term stability of purchasing power in order to meet the needs of the beneficiary's old-age security is a topic of theoretical and practical significance.
Inflation has primarily existed in an environment where paper currency is used as legal tender. When precious metals such as gold and silver were exchanged as equivalent, inflation was basically a non-issue since the precious metal itself had value. Thanks to its intrinsic value, gold's ability to maintain long-term stability of purchasing power has historically been an effective weapon against inflation. This has even been recognized by insurers. Northwestern Mutual Life Insurance Co., the third-largest US life insurer by 2008 sales, bought gold in 2009 for the first time in the company's 152-year history to hedge against further asset declines. While the investment represents a small percentage of the firm's total assets, the life insurer acquired US$400 million worth of the precious metal that year (Frye, 2009).
From an insurance company's perspective, the challenge of building consumer interest in its products generally follows two tracks. The level of marketing expenditures has increased among the major market players significantly. The industry spends over $4 billion a year on advertising thanks to traditional companies like State Farm and Allstate having to combat aggressive and innovative companies like Progressive and GEICO. GEICO, a subsidiary of Berkshire Hathaway, a Warren Buffett-run company, has raised the stakes in insurance advertising and accounts for roughly one-sixth of industry advertising expenditures (Henry and Query, 2011).
In lieu of spending heavily in advertising to build the insurance company's image with regard to price competitiveness, claims handling behavior or default risk, an alternative strategy is to produce more creative products. This strategic move is designed to diminish the commoditization of insurance products in general and to fill a need desired by insurance consumers. It is this area of the insurance stratagem that is the focus of our research, as we examine the feasibility of a gold-denominated annuity product. By comparing cash flows based on the behavior of...