Hello 1. X5.2(ii) determination of surrender(or transfer) benefits heading (refer pg 13 of solution) 5th para says format of surrender penalty will depend on type of charges used to recoup initial exp...eg - reduced level allocation rate in monetary terms, FMC as % of fund etc.. I could not make sense here how does it define the way of expressing penalty in monetary or percentage form? 2. X5.2(iv) merits of proposed calculation heading (pg 17 of solution) second last para... Statement - it is right to impose an MVR on switching otherwise PH could avoid impact of any drop in asset values i,e. select against the company.. I did not understand this point Thanks in advance
Hi This is simply saying that if fund management charges are taken, which are a percentage of fund, then the loss of these future charges from surrendering should be met by a percentage of funds. If reduced allocation rates are the only charge, then the company will be losing a monetary amount of each premium to cover their expenses, and so these should be met by a monetary surrender penalty. If no MVR, then when investments are performing badly and asset shares are lower than guaranteed values, policyholders could switch their guaranteed amount and buy units at a lower price in another fund. This would produce a loss in the existing fund equal to guarantee - asset share. The MVR is there to recover this loss and discourage this selective switching. Hope this helps. Thanks Em
