Chapter 21 Surrender values

Question 1

(i) Describe the most important objectives of the company when determining surrender
values. [5]

Answer 1

The factors to consider in determining without-profits surrender values are:
 policyholders’ reasonable expectations
 treating surrendering and continuing policyholders equitably
 at early durations, premiums paid and illustrations given to policyholders
 at later durations, projected maturity values
 asset shares
 competition and auction values
 avoid frequent changes
 avoid discontinuities by duration
 ease of calculation
 capable of clear documentation
 potential selection against the insurer.

Question 2

State the main advantages and disadvantages of using the retrospective method for calculating surrender values

Advantages (4)

Disadvantages (3)

Other points to consider (1)

Answer 2

• Advantages
  Represents maximum company could pay without making a loss
  At early durations, may be reasonable compared with the premiums paid
  It may be consistent with values quoted in product disclosure literature
  Not overly complicated, provided necessary information available to build up earned asset share/determine suitable parameters if formula is used
• Disadvantages
  For without-profit contracts
  gives no indication of profit which would’ve been earned without surrender, hence, not easy to ensure equity either with continuing policyholders or with any shareholders
  will not necessarily run into the maturity value, except by chance
  future benefits/expected experience ignored. So values may be significanlty different from a realistic prospective value, which is likely to be the approach used to calculate auction value.
  The most complex component of the method is obtaining the necessary historic information and computing resources availability
• Other points
  Consistency with competitors depends on the method and basis used

Question 3

State the main advantages and disadvantages of using the prospective method for calculating surrender values (7)

Advantages (4)

Disadvantages (3)

Answer 3

• Advantages
  If realistic basis used with the method it will produce a surrender value that represents what the contract is worth to the company
  Therefore, it enables the company to quantify how much profit to retain and hecne maintain equity with continuing policyholders and any shareholders
  Ther surrender values will run into the maturity value, for without-profits
  It’s relatively easy to operate
• Disadvantages
  There is no guarantee that the surrender values produced will not consistently exceed the asset share
  It could produce unreasonably low surrender values at early durations, from the policyholder’s point of view
  Likely to produce comparable surrender values to those available at auction and for comparable competitors’ contracts - although the basis used will be more influential in the comparison than the method.

Question 4

Unit-linked surrender values

Answer 4

For unit-linked business, the surrender value will typically be the bid value of the units less
any surrender penalty that applies. The surrender penalty may be a percentage of the unit
value or a percentage of the premium.

Question 5

main reasons for having no surrender value under term assurances

Answer 5

low asset shares
and the cost of selective withdrawals.
 to recoup losses on early lapses (when the asset share is negative) by making some profit
on later lapses (when the asset share is usually positive)
 asset shares are quite volatile, so it would be difficult to devise a surrender value scale
that would treat policyholders fairly in relation to this
 asset shares can be negative at later durations – and/or are likely to be decreasing
towards the end of the policy – but it would be hard to sell the idea of decreasing
surrender values to policyholders, who may become disgruntled as a result.