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in BUS 3024S - Contingencies by (1.7k points)

Hi, I'm not sure how they worked out the surrender benefits in the non-unit fund. For example year 1, it says 0% of premiums paid are payable but there is a benefit included. Also, please explain why these are an inflow for the insurer (since it's added instead of subtracted)? I have provided the probabilities too which they asked in an earlier question. 


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1 Answer

+1 vote
by (2.9k points)

I suspect that it is related to the unit fund (so if you could post a picture of that, I can confirm my suspicions). 


My suspicion is that it is accounting for the fund value that the company could earn from a surrender. It's common for companies to offer surrender values slightly lower than the fund value of assets as the insurer will need to cover expenses associated with a surrender.


So the insurer would need to account for this in this calculation. If I am right, the calculation would be:


Fund value at the end of the year*(amount paid to policyholder which in this case is 0%*premium payable for year 1)*probability of surrender


And, as the years go by, the 0% changes as outlined in the question. It is a negative because this money would go from the unit fund to the non-unit fund as the insurer could then use it to offset the other benefits (like death benefits) that they offer (or just cover expenses of surrenders which are assumed 0 in this question).

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