Chapter 25 : Surrender Values

Question 1

What are the principles for calculating surrender values?

Answer 1

Acronym (PALACE DICES)

Policyholders reasonable expectations (PRE)
Avoid discontinuities
Later durations-maturity values
Asset shares
Continuing policyholders
Early durations- premiums paid

Document clearly
Infrequent changes
Competition
Ease of calculation
Selection against the insurer

Question 2

What is a surrender value?

Answer 2

An early termination of a policy in exchange for an immediate cash payment

Question 3

Which policies would we pay a surrender value on?

Answer 3

Whole life and endowment assurance (where the reserves increase with policy duration).

They are not offered on term assurances

Question 4

What are the disadvantages of the retrospective method of calculating surrender values?

Answer 4

1. It does not say anything about the profit the company would have made if the contract was no surrendered
2. Except by chance it will not run into the maturity value

Advantage: Given that all the parameters are available, it is not overly complex to calculate