Sept 21 Q1 iii)

[Actuary@22]

Hi

Pls explain why impact of lapse risk component will be limited on term business as per examiner's report.

 

[VTC]

I think the reason the lapse risk impact is limited for the term assurance business is just that the BEL is much smaller—EUR 50m compared to EUR 500m unit BEL for the unit-linked business.

 

[Lindsay Smitherman]

I think the reason the lapse risk impact is limited for the term assurance business is just that the BEL is much smaller—EUR 50m compared to EUR 500m unit BEL for the unit-linked business.

Yes - that's right, thank you. The UL business is likely to dominate the lapse risk component of the SCR.

When a term assurance lapses, there may be limited impact on the insurer (nothing is paid to the policyholder, and the reserves released are likely to be small). Whereas when UL business surrenders there is a loss of all the future charges (minus expenses & excess benefit costs) that would otherwise have accrued to the insurer, and hence loss of future profits (assuming written on a profitable basis - which we can see is the case here due to the high negative non-unit reserve component of the UL BEL).