Surrender profit query Ch22 3.2 & April 2014 1 (ii) & (iii)

[almost_there]

It states in the core reading that surrender profits (i) can be allocated to with profits asset shares, and (ii) can arise due to smoothing.

April 2014 Q1. It states a MVR is applied, making SV equal to unsmoothed asset share.

Noting that Smoothed AS > AS > GMB throughout 2013-15, it seems the purpose of the MVR is to not pay the smoothing cost to people surrendering. (Isn't there a TCF issue there & why would they not pay the face value of the guaranteed benefit?) I don't understand why the solution does not consider this smoothing cost as a surrender profit attributable to remaining asset shares?

Following from this, I'd like to clarify what a surrender profit actually is i.e. does it only represent the difference between 100% unsmoothed asset share and the amount paid out below it?

 

[almost_there]

Also doesn't an MVR mean market value REDUCTION & representing a reduction from face value of policy (here the accumulating guaranteed benefits) to the asset share?

In this question both the asset share and smoothed asset share exceed the face value, so that's poorly worded surely?

As by using the word REDUCTION couldn't a candidate easily assume that the SV would be min(face value, unsmoothed AS) ?

 

[Em Francis]

It states in the core reading that surrender profits (i) can be allocated to with profits asset shares, and (ii) can arise due to smoothing.

April 2014 Q1. It states a MVR is applied, making SV equal to unsmoothed asset share.

Noting that Smoothed AS > AS > GMB throughout 2013-15, it seems the purpose of the MVR is to not pay the smoothing cost to people surrendering. (Isn't there a TCF issue there & why would they not pay the face value of the guaranteed benefit?)

Hi
The purpose of the MVR is to protect the company against the effect of selective withdrawals. It is protecting the rest of the with-profit policyholders from the surrendering policyholder.
The policyholder will be aware of this charge as the company will need to inform them in its PPFM.
MVRs are mainly applied on surrender and not maturity and so the policyholder will benefit from the full smoothing on maturity.

I don't understand why the solution does not consider this smoothing cost as a surrender profit attributable to remaining asset shares?

The cost of smoothing is a deduction from asset share not an addition. I am not sure of your point here?

Following from this, I'd like to clarify what a surrender profit actually is i.e. does it only represent the difference between 100% unsmoothed asset share and the amount paid out below it?

Most likely yes – it represents any amount of asset share over and above what is paid out. The exact definition may depend on how it is defined in the question.

Thanks

Em

 

[almost_there]

Hi
The cost of smoothing is a deduction from asset share not an addition. I am not sure of your point here?

As this company pays unsmoothed AS not smoothed AS on surrender, and as smoothed AS > unsmoothed AS, then by applying this MVR it doesn't pay the smoothing, so doesn't this saving for the company get shared between the remaining policyholders (& shareholders)?

 

[Em Francis]

As this company pays unsmoothed AS not smoothed AS on surrender, and as smoothed AS > unsmoothed AS, then by applying this MVR it doesn't pay the smoothing, so doesn't this saving for the company get shared between the remaining policyholders (& shareholders)?

If not charged for via individual asset share, the smoothing cost is shared amongst policyholders in the fund. The MVR is in operation to protect the remaining policyholders when markets have fallen, if it wasn't applied then the company would be paying out more than asset share (which would create a cost) and a potential hit on the inherited estate which wouldn't be fair to the remaining policyholders.

Does this help?

Em

 

[almost_there]

Hi, sorry think there's some misunderstanding here. Sometimes when I talk of smoothing cost I meant from the company i.e. the difference between paying smoothed AS minus unsmoothed AS. Are we saying that the amount the company saves for the inherited estate by paying out unsmoothed AS instead of smoothed AS is surrender profit?

 

[almost_there]

Would there be surrender profit in the following examples?
(i) Company pays out smoothed AS on surrender, smoothed AS < unsmoothed AS,
(ii) Company pays out unsmoothed AS on surrender, smoothed AS > unsmoothed AS,

 

[Mandlizy]

Hi almost_there,

I would define surrender profits/losses (SP) as:

SP = unsmoothed asset share minus surrender value(SV).

Where SV = smoothed asset share

There will be surrender profits on (i).

No surrender profits on (ii) if using the formulae i mentioned above and equating SV to unsmoothed asset share.

Also just to add, applying the MVR should not result in a surrender profit (or savings) as such. In fact, it avoids a surrender loss by bringing the surrender value in line with the unsmoothed asset share.

Mandlizy

 

[almost_there]

Hi Mandlizy, thanks, your definition certainly fits these situations.