Ch26: Alterations

Question 1

Principles to consider when determining how to calculate paid-up sums assured

Answer 1

Paid-up sums assured should:
- be supported by the earned asset share at the date of conversion on the basis of expected future experience
- at later durations, be consistent with projected maturity values, allowing for premiums not received
- be consistent with surrender values, so that the surrender values before and after the conversion are approximately equal

Question 2

Principles to consider in assessing an alteration method

Answer 2

AFACES
1. affordability
2. consistency with boundary conditions
3. stability
4. avoidance of lapse and re-entry
5. fairness in terms of extracting a suitable amount of profit from the altered policy
6. ease of calculation and explanation to the policyholder

Question 3

Equating policy values

Answer 3

Value of a contract before alteration (either on a retrospective or prospective basis) can be equated to the prospective value of the contract after alterations that takes into account the requested changes to the terms of the contract plus costs of alteration

Question 4

Profit released at date of alteration

Answer 4

• the full expected profit under the unaltered contract, if a realistic prospective value is used for the policy value before alteration
• no profit at all, if earned asset share is used for the policy value before alteration
• something in between if a prospective value using a basis incorporating margins is used for the policy value before alteration

Question 5

Profit to emerge from date of alteration over the remaining lifetime of the altered contract

Answer 5

• no profit at all if realistic prospective value is used for the policy value after alteration
• profit corresponding to margins in the assumptions, if a prospective value using a basis incorporating margins is used for the policy value after alteration