Chapter 25: Surrender values

Question 1

Principles for surrender values; surrender values should: (9)

Answer 1

1. take into account policyholder’s reasonable expectations.
2. at early durations, not appear too low compared with premiums paid, taking into account any projections given at the new business stage.
3. at later durations, be consistent with projected maturity values.
4. not exceed earned asset shares, in aggregate, over a reasonable time period.
5. take account of surrender values offered by competitors.
6. not be subject to frequent change, unless dictated by financial conditions.
7. not be excessively complicated to calculate, taking into account the computing power available.
8. be capable of being documented clearly
9. aviod selection against the insurer.

Question 2

Surrender value principles (Acronym): (10)

Answer 2

P - Policyholder reasonable expectations

A - Asset shares

L - Later duration / maturity values

A - Avoid discontinuities/ selection

C - Continuing policyholders

E - Early durations/ premium & illustrations

D - Document clearly

I - Infrequent changes

C - competition

E - Ease of calculation

Question 3

Unit-linked surrender values

Answer 3

For unit-linked business, the surrender value will typically be the bid value of the units less any surrender penalty that applies.

Question 4

Methods for calculating surrender values and when they are most suitable: (2)

Answer 4

1. The retrospective method is most suitable early on for without-profits contracts
2. The prospective method is most suitable for without-profits contracts after the early stages.

Question 5

The auction value

Answer 5

The auction value of a policy is the value it would fetch if the policyholder were to transfer it as an ongoing policy to someone else.

Question 6

The prospective method for without-profits contracts:

Answer 6

For without-profits contracts, this is the value of future benefits and expenses, net of future premiums due, using estimates of future expected investment return, expenses, and mortality experience of the surrendering policyholders.

Costs of surrender should also be allowed for.

Question 7

Disadvantages of the retrospective method: (2)

Answer 7

1. It does not say anything about the profit the company would have made if the contract were not surrendered. Hence it is not easy to ensure equity either with continuing policyholders or with any shareholders.
2. Except by chance the surrender value will not run into the maturity value.