26. Alterations Flashcards
Why might ph alter their policy?
- Contracts are long term and risks faced at outset may change over time leading to mismatch between risks faced and cover provided by policies
- Alter policies and/buy new ones to remove mismatch
What are some examples of alterations?
- Make policy paid up
- Change term of an assurance, incl changing whole life to endowment
- Alter sum assured
- Alter premiums
What is a boundary condition?
- Link between special alterations and more commonly occurring ones
- So terms for one alteration must be consistent with terms offered for a similar one.
- They must also be consistent with other ways a ph can achieve the same result.
Why is it important for terms to be consistent with other similar alterations or new policies?
- Ph isn’t obligated to accept quote, may thus lead to lapse and re-entry
Boundary condition for reducing term of policy to zero?
- Surrendering a contract
Boundary condition for reducing sum assured so no more premiums are payable?
- Paid-up contract
Boundary condition for increasing sum assured?
- Keep original policy and buy an incremental policy at current rates
Boundary condition for paid-up?
- Surrender
Boundary condition for term assurance to endowment?
- Buying new policy (likely to be an increase in benefit)
Boundary condition for reducing premium?
- Paid-up contract
Boundary condition for reducing term of endowment assurance by small number of years / new term close to old one?
- Alteration to itself (minor change)
What is a paid up policy?
- Premiums are no longer paid, but policy still in force.
- Original T&Cs remain unchanged, but …
- Sum assured reduced to account for no future premiums
- Value of policy is like a single premium used to buy a policy at date on which premiums stop.
Why would basis for surrender value be different from that of paid-up value?
- Costs of paying SV might be different to those of making policy paid up
- Ph continue to be in force, effect of mortality selection may be less than for surrenders
Why is consistency important between surrender values and paid-ups important?
- Would be unfair to treat surrendering ph more generously than one making policy paid-up»_space; negatively impact marketability
- Selection, e.g. if bases inconsistent, can make policy paid up and surrender afterwards getting a better SV»_space; negatively impact profits
What are the principles that must be considered when calculating alteration values?
- AV must be supported by earned asset share at date of conversion on basis of expected future experience
- At later durations, be consistent with projected maturity values, allowing for premiums not received [last part if paid up]
- Surrender can be seen as limiting case of reduction in policy term. So as outstanding term tends to zero, premiums charged must be consistent with difference between SV and maturity value. . {Alteration here is reducing , BC is surrender}
- Conversion to paid-up status can be seen as limiting case of reducing the sum assured. Apart from differences in expenses incurred, premium after alteration must approach zero as sum assured approaches paid-up sum assured. {Alteration here is SA, BC is paid up}
- If benefits are increased, must be on terms consistent with additional premium that would be charged for new policy with sum assured equal to proposed increase. If term is extended, terms must reflect current premium basis so far as period of extension.
- Method should be stable, small changes in benefits must lead to small changes in premium ignoring alteration expenses. I.e. alteration method must ideally reproduce existing terms if policy is altered to itself.
- Terms offered after alteration must avoid option of lapse and re-entry.
- Increase in benefit may be subject to additional evidence of health depending in part on scale of alteration and when it occurs in policy’s life time.
- Costs of carrying out alteration must be recovered.
