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September 2015 Q3 (ii)

A

Act

Member
Hi,

This solution says that the shortening of the surrender penalty period would improve persistency experience in the long term on existing business. Why is this the case? I would have thought that the absence of a surrender penalty would increase surrenders

Thanks
 
Hi

Good question!

Your thought that the absence of a surrender penalty would be expected to increase surrenders is correct. Indeed the examiners report itself includes this idea : 'In particular, there may be higher surrenders in the last five years of the contract term as there is now no penalty.'

So, the idea about the change potentially improving persistency experience in the long-term on existing business must be referring to something else. This is making a more general point that the company improving a product feature, and doing this not just for new sales but also for existing customers, may be viewed positively by customers and improve their view of the company. This may in turn improve customer loyalty / persistency.

So we have two different effects, each working in a different direction here.

Lynn
 
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