Hi All, Can somebody please explain how "realistic interest rate higher than interest rate assumed in premium rates" helps in avoiding surrender and re entry option?
Hi Rajat The solution mentions two possible methods of calculating the surrender value: asset shares and the realistic prospective method. Under the realistic prospective method, the higher the realistic interest rate the lower the surrender value. This will avoid surrender and re-entry if the pricing basis is using a lower interest rate. For example, we may have calculated the surrender value using 5%, but then the policyholder can only reinvest it at the pricing rate of 4%. So the policyholder loses 1% of interest and so would not want to surrender and re-enter. Best wishes Mark
