C
calibre2001
Member
Of the Core Reading for ST2/SA2 under term assurance there is a description on withdrawal risk which reads:
My understanding of decreasing term assurance products is as follows:
-Premiums collected are linked to the original sum assured
-So negative reserves are very possible because premium is forever linked to the original SA whilst the SA is reducing with time (PV premium>PV benefits)
-negative reserves are a deceiving 'asset' because its only an asset if realised. So if the policy is lapsed, we lose this 'asset' and end up with lower profits or losses instead
What I'm not clear is how limiting the premium paying term reduces lapse risk from the Core Reading.
Is it saying that by limiting the payment term we collect the premiums sooner (possibly because it has to be repriced higher to meet the profit requirement) and therefore the impact of lapse risk is less?
Or is it saying that it influences policyholder behaviour i.e. less incentive to lapse since premium savings from lapsing (assume no CSV paid for lapsing) is less than expected?
Many thanks.
There will also be a financial risk from withdrawals at times when the reserve is negative. The risk is exarcerbated in the case of decreasing term assurances if the cost of benefit exceeds the premium being charged. This is mitigated sometimes by limiting the premium-paying term to less than policy term.
My understanding of decreasing term assurance products is as follows:
-Premiums collected are linked to the original sum assured
-So negative reserves are very possible because premium is forever linked to the original SA whilst the SA is reducing with time (PV premium>PV benefits)
-negative reserves are a deceiving 'asset' because its only an asset if realised. So if the policy is lapsed, we lose this 'asset' and end up with lower profits or losses instead
What I'm not clear is how limiting the premium paying term reduces lapse risk from the Core Reading.
Is it saying that by limiting the payment term we collect the premiums sooner (possibly because it has to be repriced higher to meet the profit requirement) and therefore the impact of lapse risk is less?
Or is it saying that it influences policyholder behaviour i.e. less incentive to lapse since premium savings from lapsing (assume no CSV paid for lapsing) is less than expected?
Many thanks.