Hi all, refer to Section 4: Analysis of the methods - the retrospective method - For without profits contracts it has a number of disadvantages including: (i) it does not say anything about the profit the company would have made if the contract were not surrendered. hence it is not easy to ensure equity either with continuing policyholders or with any shareholders. Anyone here able to explain the point above? Why would company need to consider the situation where contract were not surrendered and hence the profit made from that? Appreciate if you guys can help this out. thanks heaps!
Hi I think a good way to see this is to consider a without-profits policy that is surrendered just before maturity. A retrospective method of calculating the SV is essentially using the asset share as the SV. Provided the experience during the life of the policy has been reasonably good, we would expect the asset share of a without-profits policy as it approached maturity to be higher than the maturity value. (This is because, at maturity, the company would expect to use most of the asset share to pay the maturity value but also to have some left as the company's profit.) So, if the company paid SV = asset share just before maturity, it would be taking no profit from the surrendering policy. Indeed the SV may well be bigger than the maturity value that would be paid if the policy was kept in force. This would be odd - and not fair when we compared the treatment of surrendering and maturing policyholders. Cheers Lynn
