Hi All,
Can somebody please explain how can an asset share be negative or decreasing at later duration or near end of policy term in a term assurance contract? Please refer solution to que 21.2 of chapter 21 Surrender Value
Thanks in advance!
Hello Rajat
Term assurance contracts have very low asset shares throughout the term. There is no maturity benefit, so the premiums paid each year are close to the expenses and claims. So the money coming in and out each year are fairly similar and so the asset share remains close to zero.
However, the cashflows in and out aren't exactly the same each year.
The expense of underwriting the contract is large in the first year. So the asset share normally starts negative.
In the following years, we would expect the premiums to be more than enough to cover the claims and expenses, so the asset share rises and normally becomes slightly positive.
In the later years of the contract, the claim rate increases as the policyholder gets older. But the regular premium is constant. So eventually the claims become larger than the premiums and the asset share falls.
We would hope that the asset share would be positive at the end of the contract. Any remaining asset share is the profit made by the company. However, if claim experience has been high, or expense inflation has been high, then it is possible for the asset share to be negative at the end, so the company makes a loss.
I hope this helps explain the pattern of asset shares for a term assurance.
Best wishes
Mark
