Chapter 14_1- Alterations of Non-linked Contracts Flashcards
List the types of alterations? (4)
- Making a policy paid up
- Changing the term of the policy
- Changing the benefits/sum assured
- Changes in the type of policy
outline the basic principles that need to be followed in setting up paid up terms? (3)
- The alteration should be supportable by the earned asset share (i.e. the policy value after the alteration should not exceed the asset share)
- Consistent with projected maturity value allowing for premium no longer being received
- Consistent surrender values (before and after the alteration)
outline the general principles that should be followed when setting alteration terms? (5)
- The terms of the alteration should be supportable by the earned asset share at the date of the alteration
- Some alterations are similar to other alterations and taking out new polices which require boundary conditions to ensure consistent
- Alterations should be stable such that small changes in premiums will result in small changes in benefits
- The terms after the alteration should avoid lapse and re-entry
- The terms after the alteration should avoid anti-selection
outline possible exaples of boundary conditions? (4)
o Surrender can be considered the limiting case of reducing the policy term (therefore the premiums will be set to be consistent with the difference between maturity value and surrender value)
o Paid ups can be considered the limiting case of reducing future premiums therefore as the premiums approach zero the altered sum assured should tend to the paid up sum assured
o If benefits are to be increased it should be consistent with terms for a new policy with the sum assured equal to the proposed increases
o If the term is to be extended, the terms should reflect the current premium basis as far as the extension is concerned
outline the proportionate method of setting paid up values? (2)
- For endowments the paid up value can be set to the sum assured multiplied by the number of premiums paid over the number of premiums originally payable throughout the policy term
- The same formula is to apply to with profit contracts if the amount of the attaching bonus is to remain the same
outline observations of the proportionate method of setting paid up values? (5)
- This method results in high paid up values at short durations as it does not allow for high initial expenses
- At medium durations that paid up value is usually under estimated as investment returns are not taken into account
- The method is unlikely to be consistent with surrender values
- Allowing reversionary bonuses to remain in full force could create practical problems if subsequent calculations are based on attaching bonuses
- The method has the virtue of being simple and easy to explain to policyholders
outline the method of equating policy values? (5)
- The value of the contract before the alterations (on either a retrospective or prospective method)
- Can be equated to the prospective value after the alteration that includes requested changes
- If the policy is with-profits the company will have to decide whether to leave the face value of attaching bonuses unchanged
- Any company that leaves the attaching bonuses unchanged and allows separate surrender of these bonus will need to ensure that the surrender value does not exceed the total policy value
- It may be better to change the attaching bonuses consistent with the alteration
outline the observations of equating policy values method? (6)
- This method will produce consistent surrender values before and after the alteration if the same methodology and assumptions are used in the calculation of surrender values
- For an extension of term or increase in benefits the use of the current premium basis to calculated policy values before and after the alteration will ensure consistency with new business
- There will be consistency between alterations, paid ups and surrender values if the same bases are used
- Assuming the same basis is used to calculate policy values before and after the alteration the method will be stable
- The method will not necessarily reduce lapse and re-entry therefore premium after the alteration will need to be compared to new business premiums
- If the policy value before the alteration is less than the earned asset share and basis after the alteration is not weaker than best estimate then the alteration should be affordable
outline the surrender value respread to reduce future premiums? (3)
o Calculate the premium that the company would charge, on the current premium basis, to provide all policy benefits after the alteration
o Calculate a special surrender value that makes an allowance for the initial expense included (i)
o Spread the special surrender value over the outstanding term using the premium basis assumption in (i) and deduct this from the premium in (i)
outline the observations for surrender value respread to reduce future premiums? (6)
o It produces reasonable results when the outstanding term is reduced significantly
o It takes into account the terms of new business where the policy term is substantially increased or benefit is increased
o Lapse and re-entry will not be a problem as premiums cannot be greater than on a new contract
o The terms will be affordable if the special surrender value does not exceed earned asset share at the time of alteration
o It can produce silly answers for small changes in the term or sum assured (depending on surrender value basis and change in premium rates since inception)
o A reduction in premium may not be consistent with a conversion to a paid up status
outline the paid up policy value plus premium for the balance of the sum assured? (3)
i. The policy is notionally converted into a paid up policy at the alteration date
ii. If the alteration involves a change in outstanding term to maturity the Paid up sum assured is adjusted accordingly using assurance factors
iii. A premium, based on the current premium basis, is then charged for the balance of the sum assured
outline the observations of the paid up policy value plus premium for the balance of the sum assured? (4)
- The method produces acceptable results when applied to a reduction in premium alteration if the term is unchanged
- It would unlikely produce the original premium if the policy was altered to itself
- If the paid up basis is consistent with the surrender value basis a reduction in term would produce a normal surrender value (otherwise there would be inconsistencies)
- Immediately not obvious whether it meets the requirements of the other principles
outline the accumulation of premium arrears/surplus? (2)
- The current premium is compared with that which would have been paid if the policy had been in its altered form since outset
- The difference is accumulated to the alteration date and spread forward as an adjustment for latter premiums
outline the observations of the accumulation of premium arrears/surplus? (5)
- The method leaves the policy unchanged if the terms are unchanged hence it is good for small changes to durations and sum assureds
- If accumulation is on the premium basis then consistency could be achieved with surrender and paid up values if they also follow the premium basis
- The method is likely to be less suitable for with profit contracts
- There method cannot be used if the “new” policy was not available at the outset
- It is not immediately obvious if remaining boundary conditions and terms will be met
outline the considerations for with profit contrcats when using the equating policy values technique? (4)
- For ease of administration the company will not want to differentiate between altered an unaltered polices when declaring bonuses
- Therefore it needs to solve what basis need to be used in the alterations such that equity is maintained between altered an unaltered contracts
- This could be interpreted that at maturity the policy can receive a terminal bonus according to the companies normal scale
- The company will need to do some specimen calculations before determining basis which they are comfortable maintains equity
