Recently I read a wonderful book called Being Mortal by Atul Gawande, a US doctor of Indian origin. It is extremely well written. What struck me particularly was how the issues facing the medical profession are not dissimilar to those facing the actuarial profession.
I comment on Tim Sheldon's article, With-profits endgame, in the Jan/Feb 2017 issue of The Actuary.
He suggests that mortgage endowment policies could be allocated a special share of the estate, in recognition of the shortfalls of maturity payouts below the mortgage target.
I submit that mortgage endowment policies should be compensated as of right, not as a voluntary allocation from the estate. The policies are not propitious for a reason that seems to have been overlooked.
If interest rates are low, the shortfalls emerge. If interest rates are high, inflation will also be high. This results in a double strike to the policyholder's prospects for a propitious policy.
There is a high tax bill borne by the fund. Then the surplus is diminished, in real terms, by the inflationary-induced reduced purchasing power of money.
This can be seen as follows. Suppose the tax rate is 20%, and the real interest rate is 4%. Inflation is f%. The nominal rate of interest is (f + 4)%. After tax, this is: 0.8 x (f + 4)%.
The real interest rate is: 0.8 x (f + 4)% - f%. = 3.2% - 0.2 x f%. The real interest rate reduces as inflation increases.
To the best of my knowledge, everybody has falsely assumed that the endowment will redound to the benefit of the policyholder, if the policy produces a surplus - over and above the mortgage target - in an economic climate of high interest rates.
Actually, the premium will be higher than needed to meet target, to the disbenefit of the policyholder as the policy ill performs in terms of real returns.