Life insurance - Disintermediation vs. Surrender risk

It’s the same thing? Thanks.

Disintermediation: borrowing against the cash surrender value of a policy to reinvest elsewhere at a higher interest rate

Surrender risk: Policyholders can typically surrender their policies without the insurer’s approval. This causes problems for unrecovered acquisition costs, costs to process the surrender, coming up with cash to cover the cash surrender value, etc.

So disintermediation risk is a special case of surrender risk?

Not exactly. What policyholders are trying to do is access the cash surrender value of a policy and reinvest elsewhere. They have a choice on how to get to the CSV, but it has different consequences for the insurance contract: loaning leaves the underlying contract in force, surrendering renders it null and void. Also, loans and surrenders occur for reasons other than policyholders looking to get higher returns.

OK I am confused. Doing a search on “disintermediation,” some people say it is

  1. A loan against the value of the cash surrender policy, and others are saying it

  2. Is the act of no longer using the insurance company as a middleman or intermediary (i.e., you are no longer investing through insurance products they offer) and instead surrendering your policy to invest in the market.

Is it a loan against cash surrender value or is it the surrerender of the policy itself (i.e., breaking of ties with the insurance company to invest in the higher interest rates in the market)?

Per the CFAI Volume 4 Glossary, disintermediation refers to withdrawing funds from financial intermediaries (usually insurance companies) for placement w/ other financial intermediaries (other insurance companies, bank, etc.) offering a higher return or yield. One may withdraw funds from a financial intermediary for the purposes of direct investment, such as withdrawing from a mutual fund to make direct stock investments.

From this definition provided by CFAI, it sounds like it is a direct withdrawal of funds that are invested elsewhere to obtain a higher return. It’s definitely an interesting concept, but I think for the purposes of Saturday’s exam as long as we know that this is a risk inherent in the economic landscape for pension funds that results in an increase in liquditiy constraints and potentially a disruption in portfolio management we should be okay.


Bumping this. Thought it was worth a read.