Alterations

Question 1

List the types of possible policy alternations

Answer 1

1) Surrendering a policy
2) Making it paid up
3) Altering sum assured
4) Altering term of an assurance
5) Altering premiums

Question 2

Paid up sums assured should…

Answer 2

1) Be supported by the asset share at the date of conversion, on the basis of future experience
2) At later durations, be consistent with projected maturity values, allowing for premiums not received
3) Be consistent with surrender values, so that surrender values before and after conversion are approximately equal

Question 3

Boundary condition

Answer 3

The idea of a boundary condition is that some alterations are similar to others.

Given that this is the case, the terms offered for one alteration should be consistent with the terms offered on any other similar alteration.

They should also be consistent with other ways in which the policyholder could achieve the same result

Question 4

List the principles against which we might judge an alteration method

Answer 4

CAFE SA

Consistency with boundary conditions
Affordability
Fairness
Ease of calculation and of explanation to the policyholder

Stability
Avoidance of lapse and re-entry

Question 5

What does it mean for an alteration to be stable?

Answer 5

Small changes in benefits should result in correspondingly small changes in premium

Question 6

Total profit from an altered contract depends on…

Answer 6

1) Method and basis for pre-alteration policy value
- determines profit released at time of alteration
- lies between 0 and full expected profit under unaltered conditions, inclusive

2) Method and basis for post-alteration policy value
- determines profit expected to emerge over remaining term

Question 7

List the two methods used to determine suitable alteration terms

Answer 7

1) Proportionate method
2) Equating policy values method

Question 8

Proportionate paid-up value

Answer 8

Paid-up value

(basic SA).(# premiums paid / # premiums payable throughout entire term)

Question 9

Advantages of using the proportionate method to calculate alteration terms

Answer 9

1) No assumptions required
2) Simple
3) Easy to explain to customers

Question 10

Disadvantages of using the proportionate method to calculate alteration terms

Answer 10

1) Its simplicity is of little use when we have computers
2) Too high at short durations, too low at longer durations
3) Unlikely to be consistent with surrender values

Question 11

Equating policy values method

Answer 11

At Tt

tV = tV’ + c

tV = policy value before alteration (prospective or retrospective)

tV’ = prospective policy value after alteration

c = costs of alteration

Essentially, the old policy value is being used as a single premium which, in addition to future premiums payable, will pay for altered policy benefits

Question 12

STEPS to carrying out the equating policy values method of alteration terms calculation

Answer 12

1) Equate policy values
2) Determine prospective/retrospective reserve
3) Renewal expense assumption
4) Ultimate or select mortality
5) Solve for unknown…
- new premium amount
- new number of premiums
- new sum assured

Question 13

Advantages of the equating policy values method

Answer 13

1) Will produce consistent surrender values before and after alteration if same methods/basis used as when calculating surrender values
2) If same bases used, consistency between…
- surrender values
- alterations
- conversions to paid-up status
3) Stable method if same basis used to calculate policy values both before and after alteration
4) Should provide affordable alteration terms

Question 14

Disadvantages of the equating policy values method

Answer 14

1) Will not necessarily avoid lapse and re-entry