Chapter 25 - Surrender values Flashcards
What are the main reasons for having no surrender value under term assurances
VANS R
- 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
- Low ASSET share
- Asset shares can be NEGATIVE at later durations which would be hard to sell the idea of decreasing surrender values to policyholders, who may become disgruntled as a result
- 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)
To determine surrender values, what principles should be considered
FARAD’S CANCER PP
- Fairness (key principle) – surrendering policyholders, remaining policyholders and insurer (shareholders)
- Affordability
– Negative asset shares at early durations meant that cross subsidy is required between surrenders at early and later durations in order to ensure affordability - Regulation
- Asset share (cost recovery) – represents the maximum the company can afford to pay (on average over reasonable period of time)
- Documented clearly => send letter to policyholder stating payment and end of contract
- Stability: do not change surrender value scales too often. Ensure smooth progression of surrender values over duration.
- Competitors’ surrender values (not be too far out of line)
- Selection against insurer (avoid) (antiselection)
- New business comparison (compare surrender values to those offered on new business)
- Ease of calculation => need simple calculation formula
- Ease of explanation to policyholders
- Surrender and re-entry (avoid)
- PRE
– Early durations: not too low compared with premiums paid
– Later durations: consistent with projected maturity values (including expected terminal bonus) - Professional guidance
What is the auction value of a policy
It is the value it would fetch if the policyholder were to transfer it as an ongoing policy to someone else
What is one of the starting points to consider what surrender value to offer
The asset share of the policy
What are the two methods of calculation of surrender values
- The retrospective method
- The prospective method
Please see page 9 for formulae
What are the disadvantages of this asset share method of determining surrender values for without-profit business
- It does not say anything about the profit the company would have made if the contract were not surrendered
- It could be inconsistent with the maturity value, negative early on and hard to calculate
What does the retrospective method of surrender represent
It will represent the earned asset share at the date of surrender or an estimate thereof.
It would represent the maximum that the company could pay without making a loss
What does the prospective surrendering method represent
It will produce a surrender value that represents what the contract is worth to the company
Which choice of method would a company prefer to use to calculate surrender values
In the early years, the retrospective method is easier to use as the company will need to pay attention to the actual expenses incurred, other factors are of less importance
After the early years, the prospective method is more convenient since it is only necessary to value the future benefits, premiums and expenses
How can the profit retained be specified
(EAS -SV’) +(SV’ - SV”)
EAS - earned asset share
SV’ - prospective surrender value using same assumptions as used to calculate the office premium
SV” - Prospective surrender value using surrender value assumptions
The first part of the formula represents the profit made to date
The second part represents the capitalised value of the profit that will arise in future from the differences between the premium rate assumptions and the surrender value assumptions
Determining a basis for retrospective value
The company will need to examine its actual past experience for all the relevant factors, which will include investment earnings, expenses, mortality and (possibly) tax
Determining a basis for prospective value
Assumptions will be needed for interest, expenses, expense inflation and mortality.
Maybe tax as well
How will the interest assumption for the prospective basis be assumed
The company might consider the current weighted average redemption yield of suitable securities to be its best estimate assumption.
It may also consider the interest rate used in the premium basis if it wished to use a blended approach
How will the expenses assumption for the prospective basis be assumed
the company’s most recent expense investigation will indicate the level of renewal expenses, which may well be the same as those used to set current premium rates
How will the inflation assumption for the prospective basis be assumed
The inflation rate will probably be chosen to be consistent with the investment return assumption