Yes, surrendering a life insurance policy could also be considered to be an 'option', but it isn't (normally) a 'guaranteed option' as such - the insurer typically has discretion as to the amount paid. [Also, we don't tend to think about it in terms of 'take-up rates', but just as 'surrender rates' or 'withdrawal rates'.]
As described in Chapter 22, the benefits payable on surrender (the 'surrender value'), if any, would need to be such to be fair to the insurer, those leaving and those staying. Broadly speaking, if the amount paid on withdrawal exceeds the underlying value that the insurer holds for that policy (
eg the 'asset share' or reserve), it is more prudent to assume a high surrender rate, and vice versa.
So, as you indicate, early on in a policy even paying no surrender value at all could incur a loss for the insurer - so higher surrender rates are prudent at such durations.
At later durations, it depends on the type of policy,
eg:
- For a term assurance, no surrender value is paid (the policy lapses without value) - but the insurer is likely to have accumulated a small positive reserve / asset share for that policy once initial expenses have been recouped; so in this case, yes - it could well be more prudent to assume a lower surrender rate at medium to later durations.
- For a conventional endowment assurance, a surrender value will be paid - so whether surrender generate profits or losses depends entirely on the surrender value scale that the insurer has decided to use.
- For any unit-linked policy, the insurer makes profits from the charges that are taken from the unit fund and any ongoing premiums - so surrenders are generally not good for the insurer whenever they occur (ie even after initial expenses have been recouped) and so a higher assumption would be prudent.
Hope that helps - but don't worry if it all sounds a bit too complicated as we are definitely encroaching into Specialist level material here!
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