Chapter 31, regarding breaking up basis : page 12, the valuation basis assume no NB and cover on the current policies is terminated. however in the question (end of the chapter Q5, the assumption for breaking up, expect to see higher withdrawal rate), isnt contradict with no cover on the current policies ? or breaking up can also be no new business but let the current policies run-off therefore withdraw is allowed? material is really confusing....
Hi: need to think about the reason why the valuation is being performed. Let's say we have a portfolio of life insurance business and the insurer has gone (or looks like it is about to go) insolvent. Writing of new business will cease and that insurer is no longer able to provide cover on those policies itself. However, the policyholders have long-term insurance contracts that promise to provide the benefits stated there as long as the premiums continue to be paid (where relevant). So rather than just stopping all of those contracts, it might well be possible for the portfolio to be transferred elsewhere, such as to a central discontinuance fund or to another insurance company - which could then provide ongoing cover during the run-off of the benefits (albeit not necessarily at the full original benefit value). The valuation of the portfolio is likely being done in order to determine how much assets should be transferred to the other party in order for them to take on the outstanding liabilities. The basis would therefore need to consider the future withdrawal rate of the policies during the run-off period.
