Ch 25: Surrender values Flashcards
Factors to consider when determining without-profits surrender values are: (14)
- Policyholders’ reasonable expectations
- at early durations, premiums paid and illustrations given to PHs at inception (likely to accept a loss as asset share likely to be negative or very small, penalise later surrenders to recoup loss)
- at later durations, projected maturity values (should progress smoothly into maturity value, use prospective policy values in derivaton)
- not exceed asset shares in aggregate over a reasonable time period
- Make an appropriate contribution to profit if possible
- Take account of surrender values offered by competitors
- Not be subject to frequent change, unless dictated by financial conditions
- Should be no discontinuities over the duration of the policy
- Not be excessively complicated to calculate, taking into account the computing power available
- Be capable of being documented clearly
- Avoid selection against the insurer (including surrender and re-entry) also after market crash, need to recalc
- Take account of auction values that may be available
- Comply with regulatory and professional standrads
- Appropriately allow for the cost of administering the surrender
Auction values def, advantage and disadvantages (1 & 2)
In context of surrender values
- The value the policyholder would fetch if they would transfer the ongoing policy to someone else.
- Usually dealt with by specialised brokers
- If the PH is dissatisfied with the surrender value quoted they can always attempt to obtain higher value on secondary market.
Advantages:
* Independent assessment and perhaps more likely to be accepted as fair by the PH
Disadvantages:
* Underlying assumptions for auction values unlikely to be the same as company’s underlying assumptions
* The value may fluctuate unpredictably and may be difficult to determine without actually putting the policy up for sale
Asset shares in context of a consideration for surrender value calcs
- Represents the actually accumulated money.
- Not necessarily the only value the company could afford, may give a little more or less. However should represent the max the company can afford to payout over a reasonable period of time.
- Basing the surrender value on asset share implies distributing accrued profits (or losses) to the policyholder. (contains all of the accumulated profit to date)
- Averaging asset shares over time achievable in two ways:
* First asset shares could be calculated once per year (practical and implicitly averages over the year)
* Use smoothed asset share as basis for surrender values (then have to choose over which period to smooth)
Methods of calculation (surrender values)
- Retrospection method
* May have earned asset share on hand for each policy (if computing power is available) otherwise will calculate a retrospective reserve using formula and parameter values chosen to produce acceptable results at durations required
* Assumptions based on experience of the policy and allowance made for cost of surrender - Prospective method
* Value of future benefits and expenses, net of future premiums due using estimates of future expected assumptions (including mortality assumption for surrendering PHs) - See page 757 for formulas
Advantages and disadvantages of using retrospective method for surrender value calc (4 & 4)
Advantages:
* Represents asset share at date of surrender and thus would represent the maximum that could be paid without making a loss
* At early durations, will not look too unreasonable compared with premiums paid (if PH find deduction for initial expenses acceptable)
* Provided necessary info is available to determine suitable parameters, method is not overly complex
* If same method is used to calculate specimen surrender values for dislcosure lirerature to PHs then they would reasonably expect it to be the same for actual values.
For without-profts disadvantages include:
* Does not say anything about the profit missed out on, hence not easy ensuring equity with continuing PHs or shareholders.
* Will be different to auction values which will probably be based on realistic prospective methods
* Will not run into maturity value (unless by chance)
* Whether it is competitive will depend on basis and method that they use.
Advantages and disadvantages of using prospective method for surrender value calc (5 & 1)
Advantages:
* If realistic basis is used it will produce a surrender value that represents what the contract is worth to the company
* It enables (for without-profits) to quantify how much profit to retain and hence maintain equity with continuing PHs and shareholders
* Surrender values will run into maturity value for without-profits
* More likely to be comparable to auction values and competitors’ values since it is what is normally used (assumptions used still important factor)
* Unless a complicated basis is used, relatively easy to operate as it does not require knowledge of what has happened in the past.
Disadvantages
* Depending on basis used (realistic), values may look unreasonable from PH point of view at early durations
Choice of method
Surrender value calcs
- A table of surrender values would usually be a blend of retro and prospective
- Retro more natural approach in early durations
- Prospective more convenient in later years (difficult to choose interest rate, hence better when close to maturity)
- Profit retained will be asset share - surrender value (easy to calc for retro, for prospective depends on relationship between assumptions used for surrender value and premium calc)
Profit retained under prospective method:
- If assumptions represent exactly what future experience is, then profit retained will be the same as if the contract never surrendered
- If same as premium basis, then company only retains profit made to date.
- Can thus adjust profit retained as something between best estimate of future xp and premium basis.
- One approach is to use blended basis closer to premium basis near entry and runs into best estimate near maturity
Surrender value for unit linked products
Check ch 4, ch 17 and 23 for more info
- Normally specified at outset
- Surrender value is normally the bid value of the units less surrender penalty applied
- Penalty may be based on % of unit value or % of premium but will be designed to recoup initial expenses.
