Surrender values

Discussion in 'SP2' started by fischer, Jun 27, 2009.

  1. fischer

    fischer Member

    The core reading in the chapter on Surrender Values does an analysis of the prospective and retrospective method of calculating surrender values.
    Under this analysis, the retrospective method states that -
    "Therefore, it (the earned asset share) would represent the maximum that the company could pay without making a loss. Also, at early durations it will not look too unreasonable compared with the premiums paid."
    My question are -
    1. Is the maximum the company can pay defined as
    max(0,earned asset share)?
    The reason I think so is that if the earned asset share is < 0 early on, then the company will surely make a loss. Is this reasonable?
    Also, if there are higher than expected surrenders (on a prudent basis), it would only make things worse, wouldn't it?

    2. Why does the second sentence say that at early durations it will not look too unreasonable compared to premiums paid?
    Again, for each policy there will be high new business strain (unless it is a large single premium policy) and so asset shares would be < 0 at early durations.

    3. If we calculate retrospective reserve at time t using the pricing assumptions between 0 and t instead of actual past experience (APE) then
    (a) would this retro res calculated on pricing assumptions be lower than the retro res calculated on APE if APE was better than pricing assumptions?
    (b) would it be against PRE if the company offered the retro res calculated on pricing assumptions? My point here being that the difference between the actual earned asset share (AS) and the retro res on pricing assumptions can be taken as profit by the company.
    This part of the core reading also says that the retro res on APE represents AS - does that mean retro res on APE = AS?

    4. In the section on determining basis for surrender values based on retro and pros res, it does not mention withdrawal assumption. Is this because allowing for withdrawals would mean a lower reserve is held and so PH would receive a lower surrender value? Then again, wouldn't lower SV be a good thing to prevent anti-selection where many PH setup pols and then withdraw after some years?
     
    Last edited by a moderator: Jul 4, 2009
    fischer, Jun 27, 2009
    #1
  2. Lynn Birchall

    Lynn Birchall ActEd Tutor Staff Member

    Hi

    Yes and yes :D

    Yes, I suppose the idea is that it won't look too unreasonable compared to premiums paid, provided the initial expenses deducted don't look too unreasonable.

    Yes

    A company could do that I suppose. A prospective reserving method is probably easier though and will also enable the company to take whatever profit it chooses (by an appropriate choice of prospective reserving basis).

    Yes (or the retro res on APE might be regarded as a proxy to the AS if the company doesn't have data to do an accurate AS for all policies).

    Whether an allowance for withdrawals would result in a higher or lower reserve figure would depend on the size of the withdrawal benefit. The size of the withdrawal benefit is what we're trying to determine here. So, this could all get quite circular......

    Hope these comments help :)
    Lynn
     
    Lynn Birchall, Jul 12, 2009
    #2

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