Chapter 14: Surrender values and alterations of non-linked contracts

Question 1

Factors to consider before offering surrender values:

Answer 1

1. Market practice
2. Regulations requirements
3. Difficulty of assessing suitable terms
4. Cost of surrendering the policy versus the benefit on surrender

Question 2

There are a number of different philosophies applied in determining surrender terms: (3)

Answer 2

1. Fair profit approach
2. Fair value approach
3. Pragmatic approach

Question 3

The principles underlying the fair value approach and fair profit approach can be achieved by applying values that: (10)

Answer 3

1. Take into account policyholders’ reasonable benefit expectations (RBEs)
2. Take into account Regulation 5 on early termination values.
3. Take into account accrued and future profits from the surrendering policy.
4. Are based on smoothed earned asset shares, taking into account the company’s philosophy with regard to maturing contracts.
5. Do not exceed earned asset shares, in aggregate over a reasonable time period.
6. Take into account surrender values offered by competitors.
7. Should not be excessively complicated to calculate, taking into account the company’s administrative capability.
8. Should not be subject to frequent changes, unless necessitated by financial conditions.
9. Allow for the cost of effecting the surrender
10. Are capable of being documented and explained to policyholders clearly.

Question 4

Methods of calculation (surrender values):

Answer 4

1. The retrospective method
2. The prospective method

Question 5

Factors to consider for the calculation of values (surrender values) - non-profit contracts: (4)

Answer 5

1. Choice of method
2. Retention of profit
3. Determining a basis for retrospective values
4. Determining a basis for prospective values

Question 6

Possible alteration to a policy include:

Answer 6

1. making a policy paid-up
2. changes in term
3. changes in sum assured
4. changes in type of policy

Question 7

Alterations principles

Paid-up sums assured should be: (3)

Answer 7

1. Supported by the earned asset share at the date of conversion on the basis of expected future experience.
2. Consistent with projected maturity values, at later durations, allowing for the premiums not received.
3. Consistent with surrender values, i.e. the surrender values before and after conversion should be approximately equal.

Question 8

Methods of calculation (Alterations incl. Paid-up values):

Answer 8

1. Proportionate paid-up values
2. Equating policy values
3. Surrender value re-spread to reduce future premiums
4. Paid-up policy value plus premium for balance of sum assured
5. Accumulation of premium arrears/surplus