Surrender Values

Question 1

List 5 reasons for not having a surrender value under a term assurance

Answer 1

1) Low asset shares
2) Cost of selective withdrawals
3) To recoup losses on early lapses by making some profit on later lapses
4) It would be difficult to devise a surrender value scale to treat policyholders fairly due to the volatility of asset shares
5) Asset shares can become negative at later durations and it would be difficult to sell the idea of decreasing surrender values to policyholders

Question 2

List the factors to consider in determining without-profits surrender values

Answer 2

DaMn PAPACIES

Documentation
a
Maturity values projected
n

Premiums paid
Asset shares
PRE
Avoid frequent changes
Competition
Illustrations given to customers
Ease of calculation
Selection against insurer

Question 3

Auction value

Answer 3

The value it would fetch if the policyholder were to transfer it as an ongoing policy to someone else. Such transactions are usually dealt with by specialized brokers.

Question 4

Advantages of using the auction value as the surrender value

Answer 4

1) Is an independent assessment of policy value
2) Is perhaps more likely to result in a value which the policyholder has to accept as fair

Question 5

Disadvantages of using the auction value as the surrender value

Answer 5

1) The underlying assumptions for auction values would probably be different to the company’s own assumptions
2) The auction value may fluctuate unpredictably and so it may be difficult to determine without actually offering the policy for sale

Question 6

How does asset share differ from supervisory reserves?

Answer 6

Asset share represents the money that the company has really accumulated in respect of any policy, while the supervisory reserves represent how much money the company must hold in respect of a policy

Question 7

List two ways in which the asset share may be averaged over time

Answer 7

1) If we do the asset share calculations every so often for practicality, we will be implicitly averaging over the period between calculations
2) Asset shares can be smoothed over a specified time period so that the impact of smoothing over that period is zero

Question 8

Retrospective policy value

Answer 8

Acc(past income) - acc(past outgo)

Represents the earned asset share at the date of surrender (or an estimate thereof) and thus represents the maximum surrender value the company could pay without making a loss.

Question 9

Advantages of the retrospective policy value as a surrender value

Answer 9

1) At early durations it will not look too unreasonable compared to premiums paid less initial expenses (assuming policyholders accept the expense deduction)
2) Not overly complex

Question 10

Disadvantages of the retrospective policy value as a surrender value

Answer 10

1) It does not say anything about the profit the company would have made if the contract were not surrendered
2) Hence it is not easy to ensure equity (either with continuing policyholders or any shareholders)
3) Except by chance, the surrender value will not run into the maturity value
4) Because the method excludes future benefits, it could produce surrender values that differ significantly from a realistic prospective approach

Question 11

Prospective policy value

Answer 11

EPV(future outgo) - EPV(future income)

Question 12

Advantages of the prospective policy value as a surrender value

Answer 12

1) If calculated on a realistic basis, it will produce a surrender value that represents what the contract is worth to the company (ie the cost of surrender is equal to the expected cost of the contract remaining in force)
2) Surrender value will run into maturity value for without-profits contracts
3) Relatively easy to use since it does not require any knowledge of what happened in the past
4) More likely to produce surrender values comparable to those available at auction

Question 13

Disadvantages of the prospective policy value as a surrender value

Answer 13

1) A realistic basis may produce very low or negative surrender values early in the term of the contract

Question 14

How will the surrender value for a unit-linked contract be calculated?

Answer 14

The surrender value will typically be the bid value of the units, less any surrender penalty that applies.

This surrender penality may be:
- a % of the unit value
- a % of the premium

Question 15

List the considerations when setting a basis for a retrospective policy value calculation

Answer 15

1) Past experience
2) Smoothing of investment return
3) Competitive considerations
4) Marketing considerations
5) Profit-rentention
6) Prudence

Question 16

List the considerations when setting a basis for a prospective policy value calculation

Answer 16

1) Interest
2) Inflation
3) Expenses
4) Mortality