FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS o0o MIDTERM REPORT analysis of life insurance policy surrender activity causes, impact, and suggestions for chubb life Course name Risk Mana. TABLE OF CONTENTS ABSTRACT 5 INTRODUCTION 5 DISCUSSION 7 Chapter 1. Theoretical basis 7 1.1. Life insurance 7 1.1.1 Definitions and meaning of Life Insurance 7 1.1.2 Overview of a Life Insurance contract 7 1.2. Life Insurance Policy Surrender 9 1.2.1 Definitions 9 1.2.2 Surrender benefits vs. surrender penalties 11 Chapter 2. Research problem status 12 2.1. Life Insurance Disintermediation 12 2.1.1. Policy Surrender 12 2.1.2. Policy Loan 13 2.1.3. Surrender Option Considerations 14 2.2. Factors influencing the surrender behavior of Life Insurance policyholders 14 2.2.1. Macroeconomic factors (External environment) 14 2.2.2. Household characteristics (Internal environment) 16 2.3. Impact of mass surrenders on the insurers liquidity 16 2.3.1. Estimation of the loss when a case of surrender occurs 16 2.3.2. Estimation of the total loss when mass surrenders occur 19 Chapter 3. Solutions to the research problem 22 3.1. Methods to prevent and handle mass surrenders for government policymakers 22 3.1.1. One potential course of action in such circumstances would be to suspend the payment of surrenders. 22 3.1.2. Policymakers need to ensure that macroeconomic stability is maintained. 22 3.2. Methods to prevent and handle mass surrenders for Chubb Lifes policymakers 23 3.2.1. Regulators should take caution when lowering surrender penalties. 23 3.2.2. The balance between surrender benefits and surrender penalties 23 3.2.3. A dynamic model: participating contracts 24 3.2.4. A system of liquidity management 25 CONCLUSION 28 REFERENCES 29
FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS o0o MIDTERM REPORT analysis of life insurance policy surrender activity: causes, impact, and suggestions for chubb life Course name: Risk Management & Insurance Course code: TMAE308(GD1-HK1-2223).1 Group Number: Instructor: Ph.D Hoang Thi Doan Trang Hanoi, September 2022 TABLE OF CONTENTS ABSTRACT INTRODUCTION DISCUSSION Chapter Theoretical basis 1.1 Life insurance 1.1.1 Definitions and meaning of Life Insurance 1.1.2 Overview of a Life Insurance contract 1.2 Life Insurance Policy Surrender 1.2.1 Definitions 1.2.2 Surrender benefits vs surrender penalties Chapter Research problem status 2.1 Life Insurance Disintermediation 9 11 12 12 2.1.1 Policy Surrender 12 2.1.2 Policy Loan 13 2.1.3 Surrender Option Considerations 14 2.2 Factors influencing the surrender behavior of Life Insurance policyholders 14 2.2.1 Macroeconomic factors (External environment) 14 2.2.2 Household characteristics (Internal environment) 16 2.3 Impact of mass surrenders on the insurer's liquidity 16 2.3.1 Estimation of the loss when a case of surrender occurs 16 2.3.2 Estimation of the total loss when mass surrenders occur 19 Chapter Solutions to the research problem 3.1 Methods to prevent and handle mass surrenders for government policymakers 22 22 3.1.1 One potential course of action in such circumstances would be to suspend the payment of surrenders 22 3.1.2 Policymakers need to ensure that macroeconomic stability is maintained 22 3.2 Methods to prevent and handle mass surrenders for Chubb Life's policymakers 23 3.2.1 Regulators should take caution when lowering surrender penalties 23 3.2.2 The balance between surrender benefits and surrender penalties 23 3.2.3 A dynamic model: participating contracts 24 3.2.4 A system of liquidity management 25 CONCLUSION 28 REFERENCES 29 LIST OF TABLES Table Surrender cost of policyholder by year (Chubb Life’s policy) Table Insurer’s expenses for a case of surrender Table Total business (US$bn) Table General accounts (US$bn) 14 19 20 21 LIST OF FIGURES Figures 1, A sample of Premier Youth Universal Life insurance contract Figure Illustration of the total contract value of the participating contracts 18 26 ABSTRACT This report analyzes life insurance surrender activities to determine the factors influencing the surrendering behaviors of policyholders, estimates the impact of mass surrenders on the movement of the insurer’s cash flows, and finally, comes up with some recommendations for life insurance policymakers in preventing and handling mass surrenders The factors mentioned in this research are divided into two main types: macroeconomic factors and household characteristics, which can also be considered external and internal factors respectively We as the research team believe that the significant relationship between policy surrender and these factors strongly supports insurers' efforts to understand and actively manage disintermediation risk via insurance contract features and investment policy It is also evident that surrender activity is one of the significant motivations for the innovation and replacement of insurance policies Later on, the impact of mass surrenders on the financial liquidity of an insurance company will be elaborated on in the case of Chubb Life Vietnam and the event of a mass surrender in Korea We will then take a look at the methods implemented by insurance companies in the world, specifically in some developed countries, before drawing some next steps for government policymakers and Chubb Life’s life insurance policymakers [Keywords: life insurance, surrender, policy, Chubb Life] INTRODUCTION Purchasing a life insurance policy is one of the best ways to protect your family if something were to happen to you It’s also an essential part of any healthy retirement plan However, sometimes people find themselves with life insurance policies they no longer want or need, so they just simply surrender their policies when the need arises In 2020, surrender benefits and withdrawals accounted for the largest portion of the $747 billion at a total of $323 billion Recognizing such reality, our group decided to choose the topic “Analysis of Life Insurance Policy Surrender Activity: Causes, Impact and Suggestions for Chubb Life” Chubb is the world’s largest publicly traded P&C insurance company and the leading commercial lines insurer in the U.S With operations in 54 countries and territories, Chubb provides commercial and personal property and casualty insurance, personal accident and supplemental health insurance, reinsurance and life insurance to a diverse group of clients Chubb has more than $200 billion in assets and reported $46.8 billion of gross premiums written in 2021 Chubb’s core operating insurance companies maintain financial strength ratings of AA from Standard & Poor’s and A++ from A.M Best Chubb Life is the international life insurance division of Chubb Chubb Life has been in Vietnam since 2005 and launched its Fund Management Company (Chubb Life Fund Management Company Limited) in 2013 Chubb Life in Vietnam (Chubb Life Insurance Vietnam Company Limited) offers a range of life protection, health, savings, and investment-linked insurance solutions through its agents and its wide network of offices As surrendering life insurance policies is gaining popularity around the world, Chubb Life also gets involved in this problem This essay will talk more specifically later on using one of the most popular products of Chubb Life, Premier Youth Universal Life which is specially designed for children, as an example Through the process of researching and analyzing data, our group aspires to achieve three main goals First and foremost, we want to cover the theoretical basis of life insurance and life insurance policy surrender Secondly, we hope to analyze the mass life insurance surrender activities, using Premier Youth Universal Life as a model contract In this part, we will also point out factors that influence the surrender behavior of life insurance policyholders, both in the external and internal environment Finally, through our findings, we propose some options and solutions to prevent and handle mass surrenders not only government policymakers but also Chubb Life’s policymakers We would like to express our gratitude to Ms Hoang Thi Doan Trang for her assistance during our research and study We are bound to make mistakes in our final research due to a lack of time and advanced knowledge, but we are eager to receive feedback from Mrs Hoang Thi Doan Trang to improve our report We send you our best wishes for future success! DISCUSSION Chapter Theoretical basis 1.1 Life insurance 1.1.1 Definitions and meaning of Life Insurance Life insurance (or life assurance) is a contract between an insurer and a policy owner A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured (often the policyholder) dies in exchange for the premiums paid by the policyholder during their lifetime Depending on the contract, other events such as terminal illness or critical illness can also trigger payment The policyholder typically pays a premium, either regularly or as one lump sum The benefits may include other expenses, such as funeral expenses Life policies are legal contracts and the terms of each contract describe the limitations of the insured events Often, specific exclusions written into the contract limit the liability of the insurer; common examples include claims relating to suicide, fraud, war, riot, and civil commotion Difficulties may arise where an event is not clearly defined, for example, the insured knowingly incurred a risk by consenting to an experimental medical procedure or by taking medication resulting in injury or death 1.1.2 Overview of a Life Insurance contract Parties to contract The person responsible for making payments for a policy is the policy owner, while the insured is the person whose death will trigger payment of the death benefit The owner and insured may or may not be the same person For example, if Joe buys a policy on his own life, he is both the owner and the insured But if Jane, his wife, buys a policy on Joe's life, she is the owner and he is the insured The policy owner is the guarantor and they will be the person to pay for the policy The insured is a participant in the contract, but not necessarily a party to it The beneficiary receives policy proceeds upon the insured person's death The owner designates the beneficiary, but the beneficiary is not a party to the policy The owner can change the beneficiary unless the policy has an irrevocable beneficiary designation If a policy has an irrevocable beneficiary, any beneficiary changes, policy assignments, or cash value borrowing would require the agreement of the original beneficiary Contract terms Special exclusions may apply, such as suicide clauses, whereby the policy becomes null and void if the insured dies by suicide within a specified time (usually two years after the purchase date; some states provide a statutory one-year suicide clause) Any misrepresentations by the insured on the application may also be grounds for nullification Most US states, for example, specify a maximum contestability period, often no more than two years Only if the insured dies within this period will the insurer have a legal right to contest the claim on the basis of misrepresentation and request additional information before deciding whether to pay or deny the claim The face amount of the policy is the initial amount that the policy will pay at the death of the insured or when the policy matures, although the actual death benefit can provide for greater or lesser than the face amount The policy matures when the insured dies or reaches a specified age (such as 100 years old) Costs, insurability, and underwriting The insurance company calculates the policy prices (premiums) at a level sufficient to fund claims, cover administrative costs, and provide a profit The cost of insurance is determined using mortality tables calculated by actuaries Mortality tables are statistically based tables showing expected annual mortality rates of people of different ages As people are more likely to die as they get older, the mortality tables enable insurance companies to calculate the risk and increase premiums with age accordingly Such estimates can be important in taxation regulation The mortality tables provide a baseline for the cost of insurance, but the health and family history of the individual applicant is also taken into account This investigation and resulting evaluation are termed underwriting Health and lifestyle questions are asked, with certain responses possibly meriting further investigation Specific factors that may be considered by underwriters include: ● Personal medical history ● Family medical history ● Driving record ● Height and weight matrix, otherwise known as BMI (Body Mass Index) Based on the above and additional factors, applicants will be placed into one of several classes of health ratings which will determine the premium paid in exchange for insurance at that particular carrier Automated Life Underwriting is a technology solution that is designed to perform all or some of the screening functions traditionally completed by underwriters, and thus seeks to reduce the work effort, time and/or data necessary to underwrite a life insurance application These systems allow point-of-sale distribution and can shorten the time frame for issuance from weeks or even months to hours or minutes, depending on the amount of insurance being purchased Death benefits Upon the insured's death, the insurer requires acceptable proof of death before it pays the claim If the insured's death is suspicious and the policy amount is large, the insurer may investigate the circumstances surrounding the death before deciding whether it has an obligation to pay the claim Payment from the policy may be as a lump sum or as an annuity, which is paid in regular installments for either a specified period or for the beneficiary's lifetime 1.2 Life Insurance Policy Surrender 1.2.1 Definitions Policy surrender activity is the termination of an insurance contract by the policyholder before the maturity or occurrence of the insured event where a cash value is available for payment to the policyholder Life Insurance Policy surrender activity On surrendering a Life Insurance Policy, the policyholders terminate the policy and receive surrender value from the insurer The amount of money they receive will be less than the death benefit or the income stream they would have received if they had kept the policy until maturity However, surrendering the policy may be the best option if the policyholders need access to cash for an emergency expense or other purpose Surrender Value Surrender value is the amount that a policyholder receives from the life insurer when he or she decides to terminate a policy before its maturity period In most cases, the cash surrender value will be less than the premiums paid A life insurance policy acquires a surrender value in the following two scenarios (the duration may depend on each company): ● When the policy duration is 10 years or more: In this situation, the surrender value of the life insurance policy is obtained if the premium amount is regularly paid at least for three consecutive years ● When the policy duration is less than 10 years: In this situation, the life insurance policy gets a surrender value if the premium amount is regularly paid at least for two consecutive years Types of surrender value ● Guaranteed surrender value The guaranteed surrender value is the amount guaranteed to the policy holder in case of voluntary termination of the policy by the policyholder before maturity Guaranteed surrender value is determined based on the surrender value factor specified in the policy document The surrender value factor is the percentage of total premiums paid Surrender value factor increases with the number of years of the policy The surrender value factor will grow close to 100 percent of the total premiums paid when the life insurance policy progresses nears maturity In this case, the guaranteed surrender value is calculated as total premiums paid multiplied by the surrender value factor ● Special surrender value This special surrender value of a life insurance policy is customarily higher than the guaranteed surrender value However, this entirely depends on the insurance provider Special surrender value relies on sum assured, bonuses, policy term and premiums paid To understand this, one needs to first know what paid-up value is Suppose the policyholder stops paying premium after a specific period, the policy would continue, but at a lower sum assured, which is termed as paid-up value Paid-up value = (Original sum assured x Total premiums paid) / Total premiums payable On discontinuing a policy, the policyholder gets a special surrender value, which is determined with the formula: SSV = (Paid-up value + Accrued bonuses) x Surrender value factor Where: SSV = Special Surrender Value 10 Fund conversation expense Refund expense 10,971,000 22,256,000 Total 66,118,540 73,055,740 2.3.2 Estimation of the total loss when mass surrenders occur For most insurers, the most severe liquidity stress scenario they might face is mass surrenders of policies owing to a loss of confidence in its financial strength Mass surrender scenario The scenario which is based on actual numbers for the relevant time period must be seen as one-time events and not as cumulative events It covers surrenders in the magnitude of, depending on the year, between and 3.2 times the actual ordinary life surrenders and between 30 percent and 40 percent of the annuities account balances Scenario: Assuming 10 times the actual surrenders for ordinary life insurance policies and surrenders of 60 percent of the account balance of annuity policies (Between 10 percent and 15 percent of annuities’ account balance have been surrendered in the period from 2002- 2010 The above scenario requires a four- to fivefold increase of annuities surrenders Table Total business (US$bn) The scenario chosen above leads to an increase of to times in the actual paid surrenders per year The highest amount of bond sales was required in 2008 with an 20