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Prospective surrender value

M

Missannuity

Member
Apologies for a very basic question, but why is the prospective surrender value equation as it is? Why do we take future benefits and expenses and then deduct future premiums? I can't get my head around why this is how a surrender value would be calculated.

Thanks
 
Hello

One way of looking at a surrender value is to look backwards: the company accumulates the cashflows that have actually happened on a policy. This is the basis of the retrospective method.

A different way is to look forwards: the company considers what are the cashflows that will now no longer happen in respect of the policy (ie the death/maturity benefits that will no longer be paid, future expenses that will not be incurred, future premiums that won't be received). If the policy had remained in force, the company would need a reserve to pay these future cashflows. As the policy is being surrendered, these future cashflows won't happen and this policy value is therefore available as a surrender value now.

Hope this helps a little with the idea behind the method
Lynn
 
Yes, thanks. I didn't think it was very clear in the notes as the equations just seem to be introduced with no explanation!
 
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