If an MVR is applied on surrender such that the surrender benefit is the unsmoothed AS, does it mean the following: The guaranteed benefit at the point of surrender is reduced to equal the unsmoothed AS The cost of guarantee = 0 (due to the point above) The cost of smoothing = 0
Yes: if the MVR takes the payout down to unsmoothed asset share, then your points are correct. Bear in mind, though, that the MVR might not result in a payout which is consistent with a completely unsmoothed asset share: it might allow for some smoothing, just not as much as would normally be done for terminal bonuses.
I have a few more questions on this topic: MVRs don't apply to conventional WP - is that right? Besides for surrender penalties (and assuming MVRs don't apply to CWP products), what options does the company have to reduce the surrender value in cases where it exceeds the AS?
1. I agree with Viki. MVRs only apply to UWP. 2. The insurer may have stated guaranteed surrender values at point of sale, eg return of premium on surrender after five years. In this case there is nothing it can do if the asset share is less than the surrender value. However, usually the insurer can set it's CWP surrender values to be whatever it wants (subject to PRE, competition, etc). So it can set the surrender value to asset share if it wishes. The guaranteed sum assured and reversionary bonuses are only payable on death or maturity. Best wishes Mark
The 90% payouts within 100% of unsmoothed asset share applies to surrender or maturity or both? Death ben would not be covered by this rule as it is guaranteed, correct?
Yes, the rule regarding target ranges does not apply to death benefits. I would expect death benefits to be considerably in excess of the asset share in the early years. The rule regarding target ranges can be found in the maturity benefit section of COBS 20. However, Section 20.2.15 of COBS 20 states that: The provisions dealing with the calculation of surrender payments (COBS 20.2.11 G to COBS 20.2.12 R) do not prevent a firm from setting a target range for surrender payments where the top-end of the range is lower than the top-end of the relevant range for maturity payments. Best wishes Mark
