SP2 - ch22 page 3

[Bharti Singla]

Hi all,

There is a question under section 1 of this chapter (Alterations) which says,

Explain whether the mortality assumption used in calculating a paid-up value should be higher or lower than that used for calculating a surrender value, for a whole life policy?
And the answer is:
'Mortality selection should be more intense for the surrender than for the paid-up policy. We would therefore expect the surrender value basis to use a lighter mortality assumption than the paid-up basis'.

I understand that the mortality will be lighter for a policyholder surrendering the policy than a policyholder getting the policy paid-up because for higher mortality, the policyholder would like to continue the policy to get the death benefit.
But I didn't get what the core reading means by 'Mortality selection should be more intense for surrender than paid-up'?

Could anyone please explain this?
Thanks

 

[Mark Willder]

Hi all,

There is a question under section 1 of this chapter (Alterations) which says,

Explain whether the mortality assumption used in calculating a paid-up value should be higher or lower than that used for calculating a surrender value, for a whole life policy?
And the answer is:
'Mortality selection should be more intense for the surrender than for the paid-up policy. We would therefore expect the surrender value basis to use a lighter mortality assumption than the paid-up basis'.

I understand that the mortality will be lighter for a policyholder surrendering the policy than a policyholder getting the policy paid-up because for higher mortality, the policyholder would like to continue the policy to get the death benefit.
But I didn't get what the core reading means by 'Mortality selection should be more intense for surrender than paid-up'?

Could anyone please explain this?
Thanks

Hi Bharti

It sounds like you've got the idea. Yes, surrendering policyholders have lighter mortality than paid up policies. Paid up policies have lighter mortality than continuing policies. So selection is more intense for surrenders.

I think what is confusing you is you are thinking of anti-selection as being people with high mortality (which is true when we are thinking of policyholders buying insurance). However, selection is wider than that, it is when the policyholder makes a decision to be in the more advantageous group. So in this case the healthy policyholder has chosen to be in the surrendering group, rather than continuing the policy.

Best wishes

Mark