WP Management - Discontinuance Flashcards

1
Q

What can a company aim to do on surrender?

A
  1. Want to pay out underlying smoothed unit asset share
  2. Reduce bid value of units using MVR
  3. Add a TB
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2
Q

What must SV be in relation to the PPFM?

A
  1. Consistent with PPFM statements about SV vs. AS

2. Signed off by WPA

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3
Q

What are the methods of calculation of discontinuance terms?

A
  1. Retro - can calculate the asset share and so prove it fits with PPFM policy of surrenders
  2. Prosp - add declared bonuses and allowance for future bonuses to this value
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4
Q

What is the weakness with prospective method? What is a strength?

A
  1. Might not produce values close to earned asset share
  2. So the philosophy of paying out a proportion of EAS on surrender doesn’t work
  3. Might not run into the maturity value, depends on how it allows for TB
  4. It does however allow a split of the value of basic sum assured and bonuses, so allows a surrender of just bonuses
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5
Q

Explain the thoughts behind how to calculate the SV?

A
  1. Guarantees on WP are significantly less than NP
  2. So policyholder should be rewarded for takjing extra risk if it comes off
  3. Equitable here means SV to be related to smoothed asset share, with regard to objectives/Sv philosophy of company
  4. RB may be surrendered separately, but value cannot be retrospective
  5. So prospective RB and benefits calculated
  6. Compare (5) with retrospective to determine TB
  7. Prospective to use BR and consistent RB rates
  8. Reasonable value of RB means:
    a. Value <=EAS
    b. Same TB scale allowed at maturity as for if no bonuses surrendered
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6
Q

What is another name for retrospective asset share?

A

EAS

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7
Q

What are the main assumptions in calculating SV’s?

A

Investment return - expected return on backing assets
Future RB rates
Tax - for BLAGAB contracts
Expense relief - if early on may not have got relief for high initial expenses as they’re being spread over 7 years
Market consistency - use this to compare with actual SV basis

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