MVRs

[Missannuity]

A quick question, but why do we only apply an MVR on surrender of an accumulating with-profits policy - why not on a conventional policy? What would the policyholder receive on surrender of a conventional WP policy? Would they receive the sum assured plus bonuses to date, less any surrender penalty? And a terminal bonus if sum assured plus bonuses is < asset share?

 

[Lynn Birchall]

For both conventional with-profits (CWP) and accumulating with-profits (AWP), the company may want to target paying a surrender value based on the asset share.

For AWP the policyholder is aware of the current fund value of their policy. This presents the company with an "issue" if the policyholder wants to surrender after a market crash say, when the value of the asset share may have fallen below this policy fund value. The MVR (effectively a negative terminal bonus) is then needed to explain to the customer why their SV is lower than the policy fund value.

For CWP this problem don't arise, because the policyholder is not aware of a "current policy value". The CWP sum assured (and any past reversionary bonuses) are only payable on death or maturity. They don't have to be paid on surrender. So, effectively the company can pay a SV close to the asset share, without having to "explain" a fall from a policy value (as the policyholder was not aware of one).

Lynn

 

[Missannuity]

Ah, ok, I see why now. Thanks.