1. Posts in the subject areas are now being moderated. Please do not post any details about your exam for at least 3 working days. You may not see your post appear for a day or two. See the 'Forum help' thread entitled 'Using forums during exam period' for further information. Wishing you the best of luck with your exams.
    Dismiss Notice

SP2 - Surrender Value

Discussion in 'SP2' started by Bharti Singla, Jun 24, 2021.

  1. Bharti Singla

    Bharti Singla Senior Member

    I have read this in a past papers question that surrender value can be negative in prospective method. How?
    Also, can it be negative in retrospective method as well? How?
     
    Bharti Singla, Jun 24, 2021
    #1
  2. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    Hi Bharti

    I don't think we can have negative surrender values. We can't ask the policyholder to give the insurer money when they surrender.

    I think you must be referring to negative reserves, which are certainly possible.

    A retrospective reserve, eg the asset share, is often negative early on if initial expenses exceed the premium.

    A prospective reserve can be negative early on as the EPV of premiums will exceed the EPV of benefits and expenses for a profitable regular premium contract.

    Best wishes

    Mark
     
    Mark Willder, Jun 24, 2021
    #2
    Bharti Singla likes this.
  3. Bharti Singla

    Bharti Singla Senior Member

    Hi Mark,
    Thanks for this.

    I have one more question on the same topic, from chapter 21, page 9:
    The question asks to calculate surrender value using prospective method for an endowment assurance with £20,000 sum assured payable at death.

    The surrender value is coming as £8,880.

    Although it is an endowment assurance, the question doesn't talk about the maturity benefit, why?
    And even if I assume that maturity benefit is same as death benefit, then why would the policyholder prefer getting only £8,880 by surrending rather than getting £20,000 at maturity for an endowment assurance? Basically, why would policyholder surrender an endowment assurance contract?
     
    Bharti Singla, Jun 25, 2021
    #3
  4. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    Hi Bharti

    A without-profits endowment assurance will always pay the sum assured on the earlier of death or maturity. So the question only needs to tell you whether the death benefit is paid immediately on death (or at the end of the year).

    Several reasons to surrender (this would make a good exam question):
    the policyholder doesn't need to pay the future premiums of 1733 for 5 years
    the surrender benefit is payable now rather than waiting for 5 years (so the impact of discounting)
    the policyholder needs money now, eg to repay a loan
    the policyholder has no further need for life cover
    the policyholder can get a better deal elsewhere.

    Note that the surrender value has been calculated prospectively, so 8880 is what this policy is worth under these assumptions.

    Best wishes

    Mark
     
    Mark Willder, Jun 25, 2021
    #4
    Bharti Singla likes this.

Share This Page