Alterations (26) Flashcards
Different types of alterations
Paid-up contracts
* P/h do not want to continue paying premiums, but still want the eventual benefit
* for w/o profit, t’s and c’s remain the same, but SI is reduced
* value of the policy is being used as a single premium to purchase a new policy on the day that original premium ceases
* basis used is different from SV:
- cost of paid-up is different from surrender
- p/h continues to have policy in force - lighter mortality assumed for surrender due to more intense mortality selection
GENERAL ALTERATIONS:
* At outset p/h has clear idea of the risks they face
* But over lifetime, risks they face may change (as do their needs)
* P/h therefore wishes to change policy (e.g. change term, sum assured, premium type)
* Quote provided to p/h, they decide if they want to take it
* important that the terms offered are consistent with those offered for other alterations
* and with the current terms offered for new policies
Change in the term of the policy (whole life to endowment)
Change in the sum insured
Change in the premium payable
principles for carrying out alterations
CLAP CRESES
Consistency
- Boundary conditions
- paid-up value consistent with maturity values (at later durations) and surrender values (same before and after paid-up)
Lapse and re-entry avoided
- this would increase cost
- would give rise to the possibility of selection
Asset share/ Affordability
- paid-up value should be supported by the EAS on the basis of expected future experience
- altered premium and current asset share should be sufficient to meet benefits and expenses post-alteration
- The basis used to calculate the policy value after alteration should at least be stronger (more prudent) than the best-estimate basis
Profit
- expected profit from paid-up policy should be consistent with that expected from non-paid-up contract
- profit expected after alteration should be the same as expected amount had the policy been written originally on its altered terms
Competition
- alteration terms should take into account wat competitors offer
Regulation
- any restrictions imposed by regulators should be taken into account
Expectations (PRE)
- marketing literature and what company has done in the past
- paid-up values consistency with maturity values
- surrender values should be same before and after paid-up
- ensure fairness: not treating surrendering policy more generously than paid-up policy
Stability
- small changes in benefits should result in small changes to premium
- ideally, the alteration method should reproduce exisitng terms if policy is altered to itself
Ease
Selection
* Example: Change 5-year endowment assurance to 10-year endowment assurance. The benefit will either be paid out at the same time than before (if death occurs before alteration) or at a later stage (if death occurs after alteration) and premiums will be received for a longer period so the premium should be lower, or the sum assured should be higher.
* Those in poor health will benefit from the alteration because they will pay a lower premium and still receive the benefit at the time they would have.
* Therefore, the company may decide to:
- Require proof of continuing good health
- Only allow alteration on specific event e.g. birth of child
- Underwrite alterations and adjust terms
- Assume higher mortality when calculating policy value after alteration, for all alterations
2 Methods of performing policy alterations
- Proportionate Paid-up values
- Equating policy values
Determining the basis for the equating policy values method
Expected profit from altered without-profits contracts
Total profit expected from altered contract depends on the relationship between:
1. method and basis for calculating the policy value before alteration (proft released on alteration)
2. method and basis for calculating the policy value after alteration (profit that is expected to emerge over the remaining term of the contract.)
Depending on the profit that the company wishes to retain, it will choose an appropriate combination of bases
Profit released at alterationd date:
full expected profit under the unaltered contract: realistic prospective value is used for the policy value before alteration
no profit at all: if an earned asset share is used for the policy value before alteration
something in between: if a prospective value using a basis with margins is used for the policy value before alteration
The profit expected to emerge:
no profit at all: realistic prospective value is used for the policy value after alteration
profit corresponding to the margins in the assumptions: if a prospective value using a basis with margins is used for the policy value before alteration
Using the current premium basis:
Before: extract some profit
After: expected to produce some more profit after the alteration
If policy increases in size= expected profit will increase and vice versa, making it reasonable
Alterations to unit-linked policies
paid-up: the units attaching to the contract at the date of conversion will remain attached, after deduction of penalty.
Boundary conditions (for general alterations)
- Reduction in term to zero is the same as surrendering a policy
- Reduction in sum assured so that no future premiums need to be paid is the same as making a policy paid-up
- Increasing the sum assured is the same as keeping the original policy and purchasing an increment policy at current premium rates
Boundary conditions (for paid-up policy values)
- paid-up value must be consistent with the surrender value
- paid-up value must run smoothly into the maturity value at later durations
- compay shoud aim to leave profit unchanged
- surrender value before change = surrender value after change
- paid-up value should be consistent woth PRE
- should be supported by EAS at the date of coversion, on the basis of future experience
Comparing different bases
How profits will change on alterations
using EPV & current premium basis:
* extract accrued profit up to date of alteration (from value before alteration)
* expected profit corresponding to that of new policies (valuing after alteration)
* results in appropriate amount of profit
calculating PUP values:
* if PUP is calculated so that expected profit is the same as that from unconverted policy, then excessive profit will be made
Other considerations
* avoid double charging initial expenses and comm
* manage PRE
* alteration should be supportable by EAS
* basis should be consistent with new business
* ease - calucalate and explain
* whether suitable for all alterations
* boundary conditions
* policy conditions
* PRE
* New marketing
* admin systems
* staff training
* regulation
* competitors
* not changin basis too often
* terms should ensure fairness between altering and non-altering
terms after alteration should be supportable by the earned asset share
What does this mean?
the altered policy should not need more than the future premiums after the alteration plus the current asset share to meet the benefits and expenses of the post alteration policy.
Methods of calculation
Proportionate paid-up values
The method and Meeting the principles
Paid up value = SA * Premiums paid to date/total premiums payable throughout the term
Principles:
- Affordability: Values are too high at short durations (no allowance for initial expenses) and too low at medium duratons (no allowance for investment earnings)
- unlikely to be consistent with surrender values
- very simple to apply and explain to policyholders
Methods of calculation
Equating policy values
The method and Meeting the principles
The value of the contract before alteration, on a prospective or retrospective basis, can be equated to a prospective value after alteration (that takes requested changes into account)
Can be used for an type of alteration,
reserve for the policy held before the alteration = prospective reserve of the altered policy + the costs of alteration, C.
Principles:
- produce consistent surrender values immediately before and after alteration if the same methods and assumptions are used as for calculating surrender values.
- use of the current premium basis to calculate the before and after alteration policy values would ensure consistency with the terms for new contracts
- consistency between the terms for alterations, surrender values and conversions to paid-up status, if the same bases are used
- stable if same basis is used for before and after policy values
- will not necessarily avoid lapse and re-entry and the company would need to check that the premium being charged after alteration is not more than what it would charge for a completely new contract
- should be affordable if Vt <= EAS and basis vor V’t is not weaker than best estimate
Determining the basis for the equating policy values method
Assumptions
- those implicit in the pricing of a new contract issued at the alteration date
- The basis may be prudent (with margins) or realistic (without margins)
- choice between Select and Ultimate in the mortality assumption is likely to depend on whether medical evidence is required before the alteration is proceeded with
