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Ch 23 Alterations to contracts

U

User 1234

Member
Hi all

I have difficulty in understanding the 5th bullet point under "Meeting the Principles" for Surrender Value respread to reduce future premiums on page 15, specially the later part "a small increase in end term may produce an increase in premium if the surrender value extracts too much profit"

What is the meaning of "Surrender value extracts too much profit"?

Thank you very much in advance!!!
 
Hello

The general principle behind this method is that we start by determining the standard premium the company would charge a customer who came along on the maturity date and wanted whatever sum assured/term etc combination is required "after alteration".

We then reduce this standard premium in order to give the policyholder credit for whatever the "value" of the pre-alteration policy is at the alteration date. The value we take for the pre-alteration policy is a special surrender value.

If we work this surrender value out "generously", then we will reduce the standard premium by a bigger amount. This will result in perhaps too low a premium being charged after the alteration. For example, we could set the surrender value as being equal to the asset share. If it did this, the company would be taking no profit from the policy up to the date of the alteration. This may be considered too generous, ie the surrender value extracts too little profit from the policy prior to alteration and the resultant premium is too low.

Conversely, we could work out the surrender value using a method that gives us a low surrender value. This may be considered to be extracting too much profit and the resultant premium may be too high.

These ideas are related to the idea of retention of profit on surrender values. So, Chapter 22 Section 5.2 (including the graph) may be worth referring to as well.

Thanks
Lynn
 
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