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.
What must you consider when assessing an alteration method?
- Affordability
- Consistency with boundary conditions
- Stability
- Avoidance of lapse and re-entry
- Fairness in terms of extracting suitable amount of profit from policy
- Ease of calculation and explanation to policyholder.
Name two alteration methods:
- Proportionate paid-up values
- Equating of policy values
Define the proportionate paid-up values method
- Basic sum assured X (total number of premiums paid)/(total number of premiums already payable throughout term)
- Used for conversion to paid up
Discuss the merits of the proportionate method
Affordability:
* Likely too high at early durations as initial expenses not allowed for.
* Likely to low at medium durations becasue investment earnings not allowed for.
Consistency with boundary conditions:
* Unlikely to be consistent with surrender values.
Ease of calculation and explanation:
* Simple to apply and explain to ph.
Define the equating policy values method
- Value of contract before alteration on prospective or retrospective basis = Value of contract after alteration on a prospective basis + Cost of the alteration.
- Used for any alteration
Different ways of defining equating of values method
Old policy value = New policy value + alteration expense
Old policy value + new value of premiums = New value of benefits + New value of expenses + alteration expense
EPV[Income] = EPV[Outgo]
Discuss the merits of the equating of values method
Affordability
Consistency with boundary conditions
Stability:
* If same basis is used for before and after policy values, method is stable.
Avoidance of lapse and re-entry:
Fairness in terms of extracting suitable amount of profit from policy:
Ease of calculation and explanation to policyholder:
Which relationships does the total expected profit from an altered contract depend on?
- Method and basis for calulating policy value before alteration»_space; determines profit released at time of alteration
- Method and basis for calulating policy value after alteration»_space; determines profit expected to emerge over remaining term of contract
Describe the profit released under different bases for policy value before alteration
Realistic basis and prospective value:
Full expected profit contract under unaltered contract
Original premium basis and prospective value:
Profit made to date
Asset share:
None
Prospective value with margins:
Between the two above
Describe the profit expected to emerge under different bases for policy value after alteration
Realistic basis and prospective value:
None
Prospective value with margins:
Margins
Which assumptions will be used when calculating PV
- Those in pricing of new contract to provide benefits before and after alteration
- Basis:
Prudent or realistic - Mortality:
Select vs ultimate depends on if medical evidence is required before alteration
Briefly explain how paid-up conversion would work for unit linked
- Attaching units at date of conversion stay attached.
- May be penalty that is applied
