The surrender of life policies accounts for a large proportion of the total outgo of life assurance companies, in 1987 amounting to £3.6bn or 46% of funds returned to policyholders. In practice most surrenders involve a simple two way interaction in which a policyholder requests a surrender price from the issuing office, and accepts the value without question or negotiation. However, the increasing volume of surrenders, coupled with increasing dissatisfaction of policyholders with the level of surrender prices, has lead to the emergence and development of an imperfect and unorganised market in secondary policies. This market trades less than 5% of the potential volume of tradeable policies. The volume of surrender and the absence of an organised market (which could provide alternative purchasers of mid-term policies, competition and improved values) provides the context and underlying hypothesis for the study. From observation, it appeared that, for the market to evolve, the following developments were necessary. i) A level of organisation and co-operation in which intermediaries co-ordinate the offer for sale from large numbers of individual policyholders with secondary investor's offers to purchase large volumes of policies. ii) Computerised procedures for valuing policies and bundling them appropriately to meet the needs of investors. The research project was interactive with the developing secondary market and included a close involvement in the development of a sophisticated trading system for one group of companies. The Thesis The heart of the thesis is the development of a number of algorithms which are designed to value portfolios of secondary life policies. The valuation procedure uses a discounted cashflow approach which allows the calculation of IRR on the basis of expectations about the future bonus performance of life offices. For each policy there is a statistically measurable chance of the policyholder dying before the maturity date. The implicit value of this effect is accounted for in the valuation procedure. The valuation procedure is based upon an understanding of the sorts of policies likely to be available, the valuation services demanded and the sorts of investment products which may be created through the bundling and packaging of policies. This understanding is developed througha study of the economic interrelationships between policyholder and issuing office and from the viability study of the level of surrender demand in the market and the size of margins between surrender and investment value.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:302973 |
| Date | January 1991 |
| Creators | Clode, Peter |
| Publisher | Nottingham Trent University |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
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