Hi, this comes from chapter 30. When policyholders surrender bonus separately from the rest of a with profit policy, the surrender value is calculated prospectively. My question is why is the prospective method necessary here, as the retrospective method is needed to check that surrender value is less than earned asset share. Appreciate that the future bonus is included in the prospective method to give policyholders the profits accumulated but not yet distributed, and this can not be done in the retrospective calculation, however the cap of earned asset share is there so I dont see the point of prospective method at all. Can someone please help? Thank you.
I can think of a blended approach, calculating SV retrospectively early in the policy duration and later prospectively when the policy is closer to maturity. So perhaps the policy is closer to maturity in this case? I think it also depends on what bonus is to paid out on surrender; whether the insurer wants to release only the reversionary bonuses declared to date or future RB and TB as well. SV not exceeding earned asset share is indeed one of the criterion to be considered in calculating the SV so this will be required whatever the method/assumptions are used to calculate the SV.
The surrender value will almost certainly be less than the asset share as the policyholder is only surrendering part of their policy. So calculating asset share doesn't really help us decide what surrender value to pay. If the policy remains in force to maturity we have to pay out the declared bonuses even if the asset share is insufficient to cover them (ie if the guarantee bites). So we should use the prospective method to value this cost. Best wishes Mark
Thanks Mark for pointing out the asset share is of course bigger than the surrendering bonus (I should have thought about this!) and prospective method is needed here.
