If there are surrenders possible under an endowment assurance policy, then should we allow for the surrender values in the calculation of net premiums, and net premium reserves? If not, why?
In conventional endo. assu. product we allow for surrender value with respective probabilities. And this value forms negative cash flow.
I believe you are talking about profit testing here. I saw a question where surrender values were not allowed in the calculation of net premiums.
Surrender values are never allowed for in net premiums or in net premium reserves. The net premium is always just calculated as the premium required that will pay for the contractual policy benefit (ie the sum assured, not any surrender value), ignoring expenses. The net premium reserve likewise is the reserve required to cover just the contractual sum assured (+ any declared bonuses to date, in the case of a with profits policy), deducting the value of the future net premiums - again never allowing for any surrender value. Robert