14.2 Alterations Flashcards
Paid-up
Changes in term
Changes in sum assured
Changes in type of policy
Supported by EAS at alteration date
Add from F102 summaries
Surrender is limiting case of reduction to policy term. As outstanding term tends to zero, charged premiums will be consistent with diff between SV and MV
Conversion to paid-up status limiting case of reduction in premium. Apart from differences in incurred expenses, premium after alteration must approach zero as sum assured approaches paid-up sum assures
If benefits increased, terms must be consistent with additional premium charged for new policy, w sum assured = proposed increase
If term extended, terms must reflect current premium basis as far as period of extension is concerned
Methods must be stable in that small changes in benefits must = small changes in premium if alteration expenses ignored.
Alteration must ideally reproduce existing terms if policy altered to itself.
Terms offered after alteration must avoid encouraging lapse and re-entry.
Proportionate paid-up values
Equating policy values
Surrender value re-spread to reduce future premiums
Paid-up policy value + premium for balance of sum assured
Accumulation of premium arrears/surplus
Method 1: Basic SA * # premiums paid / total # of premiums payable
Endowment assurance and w/p (if attaching bonus amount will be unchanged)
Method 2 for w/p: Reduce amount of attaching bonuses in proportion to reduction in SA
May / may not receive bonuses once paid up
Pros:
Simple to apply and explain to ph
Cons:
Usually too high at short durations since no allowance for expenses. Too low at medium durations since no allowance for investment earnings
Unlikely consistent with SV
W/p: allowing declared reversionary bonuses to remain in full force can cause practical probs if future policy calcs are based on attaching bonuses. E.G. terminal bonus proportionate to attaching declared bonus
May impose lower bonus rates on paid-ups to maintain equity with those maintained in full force»_space; causes practical and presentational results
For all alterations
Equate prospective / retrospective policy value before alteration to prospective value after alteration with requested changes in contract terms
If leaving attaching bonuses unchanged and have separate surrender for bonuses, must ensure SV after alteration > total policy value.
Must change attaching bonuses in way consistent with alteration
Pros:
Produces consistent SV immediately before and after alteration is same methodology and assumptions used to calc SV
If extending policy term, using current pricing basis to calc before and after alteration policy values»_space; consistency with terms of new contracts
Consistency between terms for alterations, SV and conversion to paid-up is same bases used
Method stable if same basis for before and after policy values
Policy affordable if PV before alteration not > EAS and policy value basis after alteration not weaker than best estimate
Cons:
Won’t necessarily avoid lapse and re-entry, must check premium charged after alteration not > premium under new contract
For alterations excl. paid-up status
Steps:
Calc premium that would charge on current pricing basis to offer all benefits after alteration
Calc special surrender value of existing contract, making allowance for initial expenses included in premium in (i)
Spread special SV over outstanding term using premium basis in (i) and remove from premium in (i).
Pros:
Produces reasonable results when o/s term reduced substantially, running into normal SV for conversion to immediate maturity
Accounts for terms on new business on substantial increase in term / benefits
Lapse and re-entry not problem since premium not greater than for new contract
Affordable if special SV doesn’t exceed EAS at alteration date
Cons:
Can produce silly results for small changes in o/s term or SA depending on SV basis and changes in premium rates since start of policy
May not be consistent with conversion to paid-up on large reduction in premium with o/s term unchanged.
Can’t be used for conversion to paid-up
Steps:
Notionally convert policy to paid-up as at alteration date
If alteration involves change in o/s term»_space; paid up amount converted to appropriate new o/s duration factors using assurance factors.
i.e., Paid up SA after change=Paid up SA before change ×Ax+t:n-tAx+t:m-t
where n and m are original and revised total terms respectively
Premium using current pricing basis charged for balance of required SA
Pros:
Acceptable results when applied to reducing premium substantially, running into paid-up value if term unchanged
Cons:
Unlikely to reproduce original premium if altered to itself
Not immediately obvious if meets requirements of other principles
If paid-up b=value based on SV, i.e., it is the latter thrown inro reversion using SV assumptions, reduction in o/s term to 0 produces normal SV. However, if conversion to paid-up status is on another basis, method may be inconsistent with SV on substantial reduction in o/s term.
Can’t be used for conversion to paid-up status
Steps:
Current premium compared to one that would have been paid if policy had been altered from start.
Difference is accumulated to alteration date and spread forward as adj. to original premium.
Pros:
Leaves premium unchanged if policy terms unchanged. So good for small changes to term or SA esp. near to entry
Ignoring expenses and mortality AND arrears/surplus accumulated on premium basis, can achieve consistency with SV and paid-up values if they also follow premium basis
Cons:
Unlikely suitable for w/p. May be necessary to retrospectively grant/remove bonuses to arrive at “what if ph had taken policy from outset”. This may seem unfair or allow selection against company.
Can’t be used if new policy wasn’t available at outset
Works well in early terms of contract. In practice, expenses like commission vary with term- so consistency unlikely achievable for substantial reductions/extensions in term. Plus, …
… premium basis may change so ignoring expenses and mortality considerations, substantial extension of term would likely be inconsistent with current premium scales.
Not immediately obvious whether remaining BC and constraints would be met.
Market basis: No profit accounting for appropriate investment assumptions
● Premium basis: P/L that grow significantly with changes in market rates from inception
Won’t want to declare bonuses diff to unaltered contracts for admin purposes
● So must choose appropriate basis for before and after alteration reserves for equity between policies
● Could be interpreted as paying the terminal bonus at maturity of altered contract according to normal scale…however
● Creates conflict with desire to pay EAS. But if surrender basis before and after alteration is close to EAS of altered policies, and of policies with same duration as altered contract. This is achieved automatically
● Will make expected profit from “new” contract providing future benefits from alteration date
● Extra profit depends on method and basis. E.g.
✓ EAS re-spread using market basis»_space; No additional profit
✓ SV re-spread using prudent basis»_space; profit implicit in SV + future profit in margins
✓ SV using realistic assumptions»_space; Profit implicit in SV
● At new maturity date, equitable terminal bonus = TB appropriate to new contract at alteration date PLUS additional amt wrt period before alteration
● If SV based on EAS, additional amt may be:
✓ SV using realistic basis: None
✓ SV with margins: Margins
● Appropriateness of basis will depend on if planning to determine TB based off alteration date original entry date
● Unlikely to be equity if using original entry date
● Can have notional entry date giving term and duration allowing policy to participate in TB on same terms as unaltered policies
● Make adjust to avoid double counting E and C except to allow for extra alteration expenses and additional initial C payable at alteration date
● If paid-up calue calced s.t. profit = profit of unaltered contract»_space; excessive profit
● May use special paid up value to combat this but defeats object of using method
● Paid-up policy value likely calc on basis maintaining equity
● May assume terminal bonus based on term from original inception date
● Terminal bonus at maturity wrt balance of SA afteration will be appropriate to term from alteration date
● If two parts of altered contract aren’t given terminal bonuses, unclear if equity achieved
● Make adjust to avoid double counting E and C except to allow for extra alteration expenses and additional initial C payable at alteration date
Puts ph in same position as if he/she had taken out contract in altered form from original entry
Prudent
Those implicit in new contract issued at alteration date to provide benefits before and benefits after alteration
Select vs Ult mortality depends on if medical evidence required
Realistic
Similar to profit test basis for new contract
Select vs Ult mortality depends on if medical evidence required
