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September 2016 Question 1 Part (iii)

T

Tong_Tong

Active Member
In the marking scheme it said "The penalty should reflect the resultant loss to the company, based on the difference between the future interest it would have received on the loan and the income it would receive on investing the repayment."

I dont know why this is the case. Under a surrender the exit charge should reflect the amount of profit company would recieve from the interest payment. In which case it would be the difference as stated in the marking scheme and the profit margin that the company would recieve from recieving the interest payment. Unless of course the interest payment is just enough to break even
 
Tong_Tong said:
In the marking scheme it said "The penalty should reflect the resultant loss to the company, based on the difference between the future interest it would have received on the loan and the income it would receive on investing the repayment."

I dont know why this is the case. Under a surrender the exit charge should reflect the amount of profit company would recieve from the interest payment. In which case it would be the difference as stated in the marking scheme and the profit margin that the company would recieve from recieving the interest payment. Unless of course the interest payment is just enough to break even
Click to expand...
Hi

Sorry, when you say as per the marking schedule, what are you referring to?
The solution follows the surrender value principles in that it is treating surrendering and inforce policyholders equitably as the surrendering policyholders are paying for the loss of future profits the company would have earned had the policy stayed inforce. And as this is a single premium policy, this future profit is coming through the interest rate applied to the loan.

Hope this helps.

Thanks
Em
 
Hi,

For this same question, the marking schedule (ASET) for Part B says '... the company may incur a loss if it has used Product A as an asset to match Product B's liabilities'. Would someone be able to explain what is meant by this please?

Thanks
 
This question part is about considerations in relation to setting surrender penalties.

Product A is an equity release mortgage, so effectively is an asset to the insurer (repayment of the loan) rather than a liability. Being part of the company's assets, it can be used to back liabilities, such as those arising under Product B.

Equity release mortgages can be relatively illiquid assets, so there is a risk that if there were a lot of surrenders under Product B and the insurer had to attempt to liquidate those assets in order to pay those surrenders, it would make a loss on doing so. This would therefore need to be considered when setting a surrender penalty.
 
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