Hi,
Please could someone let me know if my understanding is correct. Thank you
.
Q1) Profits for Prospective and Retrospective SV.
Retrospective SV. I understand that the profit retained is zero for Retrospective SV.
This is because the whole asset share (assuming no surrender penalties) is given to the policyholder on surrender. The calculation of the SV is done by considering all cashflows of the policy; i.e. all timings and amounts of premiums, charges, investment returns etc.
Prospective SV: Original Pricing basis and Current Best Estimate basis.
Assume there is a product that has a 20 year duration. At 20 years, policy maturity, the company will make a profit of £100. At 10 years from commencement, the company will make a profit of £50. If a prospective SV (without any surrender penalties) is calculated at 10 years:
Then on an Original pricing basis, the profit retained by company is the profit earned to date. This is £50 in this case.
On a Current best Estimate basis, the profit retained by the company is the total profit as if the policy had not surrender. This is £100 in this case.
However, it seems to me that a SV on a Current best Estimate basis is not fair on the policyholder surrendering as total profit is taken. It would be fairer to use the Original Pricing basis.
Q2) Deferred Annuity:-
I am slightly confused on the concept of a Deferred Annuity (DA).
Exam 2018 April, Q7, States
"A life insurance company has taken on the existing insurance risk of a pension scheme through a “bulk buy-out” arrangement. Under this arrangement the life insurance company has taken on the risk via a number of without profits deferred annuity liabilities to pay benefits to the members when they retire.
The company has incorporated the bulk buy-out policies (i.e. the deferred annuities) into its actuarial valuation model and processes, and is able to produce a monthly valuation of the liabilities. The policies and liabilities can be identified at a member level.
The company has been asked to provide transfer values (i.e. the value of the member’s deferred annuity, which they can transfer to another provider) to members at the point at which the members request them."
From an insurers point of view, does this mean a DA is such that the insurer receives premiums up to the retirement date of a policyholder and then provides an annuity to the policyholder. Thus the policyholder is "locked-in" into taking an annuity with this insurer?
The third paragraph seems to suggest that for a DA the policyholder can transfer their policy to another insurer before the annuity starts (i think its called the vesting date?).
Please could someone let me know if my understanding is correct. Thank you
.Q1) Profits for Prospective and Retrospective SV.
Retrospective SV. I understand that the profit retained is zero for Retrospective SV.
This is because the whole asset share (assuming no surrender penalties) is given to the policyholder on surrender. The calculation of the SV is done by considering all cashflows of the policy; i.e. all timings and amounts of premiums, charges, investment returns etc.
Prospective SV: Original Pricing basis and Current Best Estimate basis.
Assume there is a product that has a 20 year duration. At 20 years, policy maturity, the company will make a profit of £100. At 10 years from commencement, the company will make a profit of £50. If a prospective SV (without any surrender penalties) is calculated at 10 years:
Then on an Original pricing basis, the profit retained by company is the profit earned to date. This is £50 in this case.
On a Current best Estimate basis, the profit retained by the company is the total profit as if the policy had not surrender. This is £100 in this case.
However, it seems to me that a SV on a Current best Estimate basis is not fair on the policyholder surrendering as total profit is taken. It would be fairer to use the Original Pricing basis.
Q2) Deferred Annuity:-
I am slightly confused on the concept of a Deferred Annuity (DA).
Exam 2018 April, Q7, States
"A life insurance company has taken on the existing insurance risk of a pension scheme through a “bulk buy-out” arrangement. Under this arrangement the life insurance company has taken on the risk via a number of without profits deferred annuity liabilities to pay benefits to the members when they retire.
The company has incorporated the bulk buy-out policies (i.e. the deferred annuities) into its actuarial valuation model and processes, and is able to produce a monthly valuation of the liabilities. The policies and liabilities can be identified at a member level.
The company has been asked to provide transfer values (i.e. the value of the member’s deferred annuity, which they can transfer to another provider) to members at the point at which the members request them."
From an insurers point of view, does this mean a DA is such that the insurer receives premiums up to the retirement date of a policyholder and then provides an annuity to the policyholder. Thus the policyholder is "locked-in" into taking an annuity with this insurer?
The third paragraph seems to suggest that for a DA the policyholder can transfer their policy to another insurer before the annuity starts (i think its called the vesting date?).