October 15 Q3ii)

I agree that taking this point on its own does sound wrong. However, looking at the full solution we see that we expect surrenders to go up. The solution here is just saying that there might be some positive aspects.

So the key thing to say is that increasing the surrender values will lead to higher surrenders. The Examiners Report says:

"However, a notification of change may trigger policyholders to actually consider surrendering. And hence future surrender rates may be different to those experienced before and this will need to be estimated. In particular, there may be higher surrenders in the last five years of the contract term as there is now no penalty. It will be hard to estimate future surrender rates as there is no data."

A counter argument later on under the heading of "Competitors and marketing" says:

"The overall marketing messaging may be beneficial, given that this can be seen as considering existing and not just new business which may be positive for persistency experience and even for new business. These impacts should be allowed for when considering the overall effect on profitability for the company."

So some policyholders might have surrendered because of the poor reputation of the company (eg due to concerns over their high surrender penalties). This might be because they were unaware of the penalties when they originally bought the contract. Having better surrender values might convince these policyholders to stay, eg if the policyholder has recently bought the contract and is worried that they may need to surrender in year 6, they will now be happy with the contract as it has no penalties at this time.

So we get lots of marks for discussing higher surrenders. But we can get some marks for saying that there is some good news to offset this.

I hope this helps to clarify the solution.

Best wishes

Mark

 

Yes, that's right.