Chapter 25 - Surrender Values

Question 1

Principles for life insurer to consider when setting surrender values (SVs)?

Answer 1

SPARE CAP

Selection
- Should avoid selection against the insurer, e.g. by limiting the lapse and re-entry risk.

Policyholder reasonable expectations (PRE)

• Should take PRE into account.
• At early durations, SVs should not appear too low compared with premiums paid, accounting for any projections provided at outset.
• At later durations, SVs should be consistent with projected maturity values.

Affordability
- SVs should be affordable, i.e., Should not exceed asset shares, in aggregate, over a reasonable time period.

Regulation
- Should be in-line with regulation, if applicable.

Equity

• Should maintain equity between:
• Surrendering and remaining policyholders;
• Surrendering policyholders and shareholders.

Competition
- Should take into account SVs offered by competitors.

Auction values
- Should take account of auction values.

Practicality

• Should not be subject to frequent changes, unless dictated by market conditions.
• Should not be difficult to calculate, taking into account available computing power.
• Should be capable of being documented clearly.
• Should not be too difficult to explain to the policyholder.
• Avoid discontinuities in surrender value by term.

(List adapted from F102 June 2017 Q4, F102 Nov 2017 Q6)

Question 2

Key assumptions in determining SVs on a RETROSPECTIVE basis?

Answer 2

ITEM

Investment earnings
Tax
Expenses
Mortality

(Based on actual past experience)

Question 3

Key assumptions in determining SVs on a PROSPECTIVE basis?

Answer 3

I MEET

Interest

Mortality
Expenses
(Expense) Inflation
Tax

(Relate to expected future experience)

(See F102 Nov 2017 Q6 for practical example)