Chapter 14 (SV and Alterations) Flashcards
Life insurers normally consider a number of factors before offering surrender terms. These factors include:
-market practice
-regulatory requirements
-difficulty in assessing suitable terms
-cost of surrendering the policy versus the
benefit on surrender
Different approaches to surrender values
Fair profit approach
-policyholder surrendering the policy (fulll profit)
-no efficient market in 2nd hand policies
-deduction of surrender charge
Fair value approach
-SV that approximates the fair value of policy
-efficient market exists or it would be unfair to take advantage of lack thereof
-deduction of surrender charge
Pragmatic approach
-leaves the office with profit irrespective of investment conditions
-not concerned with fairness –> need to protect office against downturns in market
-policyholders not aware of value of policies
-not good actuarial practice
What does the retrospective reserve represent?
It represents the maximum that a company can pay on surrender without making a loss.
How do we determine retention of profit on surrender using prospective method
The amount of profit depends on the relationship between the assumptions used for the surrender value and those implicit in the calculation of the office premium.
If the surrender value assumptions represent future experience exactly, then profit will be the total profit that would have been earned on policy.
If they are the same as OP, the company retains P/L made to date.
What is the basis for retrospective method
Fair profit approach - look at actual past experience.
For regular premium products, it may not follow past experience exactly as to smooth the value and avoid lapse and re-entry.
What is the basis for prospective method
Interest
-term structure of current interest rates
-should be consistent with rates used in OP
Expenses
- most recent experience investigation will indicate renewal expenses
-no initial expenses
- fair profit = remove margins in pricing basis
-fair value = leave margins in pricing basis
Inflation
-consistent with investment returns
-spread between index linked and fixed interest gov bonds
Tax
Mortality
What are all the different methods that can be used to calculate alterations on WP contracts
Proportionate paid up (Paid up) = (prem paid/total prem)*SA (HELPS)
Equating policy values (Any) = Prospective/Retro value before surrender is equal to prospective value after + cost (CLASPS)
Surrender value re-spread to reduce future premiums (All except PU) = Calc prem for all benefits, calc SV, spread SV using prem assump and subtract from prem (PASTT L)
Paid-up policy value plus premium for balance sum assured (All except PU) = policy converted to PU, PU converted to new outstanding duration w use of assurance functions, prem then calculated for outstanding SA (PPC)
Accumulation of prem in arrears/surplus (All except PU) = calc prem for benefits at POS, diff btwn premiums accum to alteration date before being spread fwd as an adjustment to latter prem. (NUCES)
How can you calculate a WP surrender value
Prospective method can be used using best estimate assumptions and consistent rates of future reversionary bonuses.
Care needs to be taken that
-value does not exceed EAS
-value should allow company to use same terminal bonus scale at maturity as if would used if the policy was not surrendered
What assumptions should be used to calculate WP surrender values
-Similar to those of non-profit.
-WP ph should absorb any deviations in experience and so less margins
-consideration needs to be given to equity between remaining and surrendering ph
-sensitive to rate of future reversionary bonus assumed
Paid up sum assureds should be
-supported by the EAS at the date of conversion on the basis of expected future experience
-consistent with projected maturity values, at later durations, allowing for premiums not received
-consistent with surrender values
What are boundary conditions for alterations that you can use as checks
Surrender = reduction in term
Paid up = reduction in SA
Additional prem = Increase in SA
Stable methods
Avoid lapse and re-entry
Judge alteration on:
-affordability
-consistency with boundary conditions
-stability
-avoidance of lapse and re-entry
-fairness in extracting profits
-ease of calculation and explanation to ph
