Hi, The overriding principle in determining discontinuance terms is that the amount offered on discontinuance should be FAIR to: The policyholder Other policyholders The provider of the benefits. Fairness is the key concern when setting discontinuance terms, however, determining what is fair is not always straightforward. Key principles to consider: Asset share Policyholder expectations Competitive considerations. The starting point for calculating the surrender payment that can be made, if any, is to consider the asset share. This is a retrospective reserve, ie looking at what has happened to the policy to date to assess its current value. Asset share = Accumulation of premiums with investment returns – expenses – cost of cover This is one reason for calculating the provisions.
Alternatively, the provider could look at a prospective reserve (or provision) as a measure of what is fair to pay out to the individual on discontinuance. This amount reflects what the provider no longer has to pay out to that individual as a result of them leaving (net of what the provider will no longer receive from them, where relevant), and so is an alternative approach to considering how much it could 'afford' to pay out when they leave. Again, as mentioned above, this is about ensuring fairness between all parties. The prospective approach would tend to be used where the benefits that would otherwise have been received are fixed or known, such as under a defined benefits pension scheme or without-profit life insurance contract.
