Ch 26: Alterations Flashcards
Possible alterations of without-profits contracts
- Making a policy paid-up
- General alterations:
* Change term
* alter sum assured
* alter premium payable
Paid-up contracts description
- Alternative to payment of surrender value a PH can receive a paid-up value or paid-up sum assured
- Don’t want to continue paying premiums but still want some eventual benefit.
- Essentialy becomes a single premium policy once it becomes paid-up
- Terms and conditions remain unchanged, except the sum assured is reduced to take account of of the fact that no more premiums will be paid.
- In effect, value of the policy is being used as a single premium to buy an insurance policy at the date on which the premiums cease
Considerations which may make bases for paid-up calc different from surrender value calc:
- Considerations which may make bases for paid-up calc different from surrender value calc:
* Costs are different
* Because policy is still in force, effect of mortality selection may be less than when the whole policy is surrendered
Considerations when calculating paid-up sums assured (3)
- Supported by asset share at date of conversion on basis of future expected experience
- At later durations, be consistent with projected maturity values allowing for premiums not received (they are easy to compare since both would be paid on same date, should look reasonable)
- Consistent with surrender values so that surrender values before and after conversion are approximately equal
Considerations for general alterations (8)
- Terms after alteration should be supportable by earned asset share at the date of alteration so as to avoid the company making a loss
- Ideally the profit expected after alteration should be the same as that before or same as expected amount had the policy originally be written on its altered terms
- Terms offered should be consistent with other similar alterations (i.e. should be consistent with other ways the PH could achieve the same result)
- Boundry conditions are useful way to test proposals
- Any methods adopted should be stable (small change in benefit result in small change in premium if expenses of alteration are ignored)
- Terms offered after alteration should avoid the option of lapse and re-entry
- Any increase in benefit may be subject to further evidence of health
- Costs in carying out the alteration should be recovered
In assessing an alteration method, judge against following principles: (6)
- Affordability
- Consistency with boundry conditions
- Stability
- Avoidance of lapse and re-entry
- Fairness in terms of extracting a suitable amount of profit from the altered policy
- Easy of calculation and of explanation to PH.
Two methods of calculating alteration terms:
- Proportionate paid-up values
- Equating policy values
Proportionate paid-up values method description
- Basic sum assured multiplied by ratio of total number of premiums actually paid to those originally payable throughout the total term
- Will only be approximately correct
Proportionate paid-up value method advantages and disadvantages (2 & 3)
Advantages:
* Very simple one to apply and explain to policyholders
* No assumptions on future experience necessary
Disadvantages:
* Usually too high at short durations (do not allow for high initial expenses)
* At medium durations usually too low as it does not allow for investment earnings
* Unlikely to be consistent with surrender values
Equating policy values method description
- Value of contract before alteration (on retro or prospective basis) can be equated to prospective value after alteration that takes into account requested changes to the contract.
- For paid-up calc:
* Equate surrender value with propsective value of altered policy - For general alterations calc:
* Reserve held for policy before equal to reserve held after alteration plus cost of alteration
Advantages and disadvantages of equating policy values method for alterations (5 & 1)
Advantages:
* Method will produce consistent surrender values immediately before and after alteration if same methods and assumptions are used
* For extention of term or increase in benefit, using current premium basis would ensure consistency with terms for new contracts
* Consistency between terms for alterations, surrender values and conversion to paid-up status if same bases are used
* Method is stable assuming same basis is used for before and after policy values
* Terms should be affordable if asset share is higher than policy value before alt and basis after alt is not weaker than best estimate basis
Disadvantages:
* Will not necessarily avoid lapse and re-entry, need to check that premium charged after alteration is not higher than it would charge for completely new contract
Expected profit from altered without-profits contracts
- Depends on relationship between basis and method before and after alteration
* Basis and method before would determine profit released at time of alteration
* Basis and method after would determine profit which is expected to emerge over the remaining term
Profit “released” at date of alteration wold be:
- Full expected profit under unaltered contract if realistic prospective value is used for policy value before alt
- No profit if asset share is used for value before alt
- Something in between if prospective value is used incorporating margins is used for policy value before.
Profit expected to emerge from date of alteration over remaining life will be:
- No profit at all if realistc prospective value is used for pol val after alt
- Profit ciorresponding to margins in assumptions if prospective value with basis (inclusing margins) is used for pol val after alt
Paid-up unit linked contracts - setting alteration penalty such that expected PV of future charges are not less that on the original policy (3)
- Apply alteration penalty at time of alteration equal to PV of expected differences in future charges (the penalty itself may reduce value of future charges)
- Company might accept degree of cross-subsidy (If some alterations lead to increased charges and some to reduced charges, overall position might be close to neutral - but open to risk of change in profile of alterations)
- If likely volume of alterations is small, negative marketing effect of penalties may outweigh the advantages of recouping “correct” expenses on each policy
