Chapter 22 Alterations

Question 1

‘paid up’ (PUP) alteration.

Answer 1

Paid-up

Instead of paying SV on existing regular premium policy, PH receives PUP value/PUPsum assured.
1. PH can stop paying regular prems, and still receive some eventual benefit (becomes similar to single premium policy)
2. T&Cs of original contract unchanged, except SA is reduced reflecting no more future regular prems
3. effectively, policy value at PUP date used as single prem for new pol (excluding another round of init expenses)
4. basis used for PUP value might differ from SV for 2 reasons
costs of making pol PUP <> costs of paying SV
may be less mortality selection effect, because PH keeps pol in force
mortality selection likely more intense for SV=> expect SV basis to use lighter mortality than PUP value basis

Question 2

What 2 broad methods do we have to calculate alteration terms?

Answer 2

1. proportionate paid up values
   approximate method
   can be used to simplify calculation of PUP values
2. equating of policy values
   most accurate method

Question 3

Paid-up sums assured should:

Answer 3

 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
conversion are approximately equal.

Question 4

Proportionate paid-up values

Answer 4

For without-profits endowment assurances, the paid-up value may be calculated as the
basic sum assured multiplied by the ratio of the total number of premiums actually paid to
those originally payable throughout the total term.
 Proportionate paid-up values are usually too high at short durations, because they
do not allow for the high initial expenses. At medium durations, on the other hand,
they tend to be too low because no allowance is made for investment earnings.
 The method is unlikely to be consistent with surrender values.

Question 5

When encountering an ‘equating policy values’ questions in an exam setting, what are some key steps which may help solve the question? (6)

Answer 5

1. Start with equating values using an equation of the form:
   old policy value = new policy value + alteration expenses
2. Decide whether to use a prospective or a retrospectve reserve
   question should state method to use for pol value calculations
   if nothing is specified, use prospective values
3. Renewal expense assumption
   unless otherwise stated, expenses expressed as a % of premium will relate to the premium that applies to the reserve calculation (new or old) concerned
4. Use of ultimate vs select mortality
   unless otherwise stated, any policy value calc’d at time t years through an existing policy will be calc’d assuming mortality appropriate to lives of select age [x] + t.
   so for all cases where AM92 mortality is assumed, reserves calculated for t>= 2 (greater than select period) will use ultimate mortality (irrespective of whether the lives were select or ultimate lives at age x)

Question 6

Calculation of terms for an alteration

Answer 6

For general alterations, the principle of the calculation is that the reserve for the policy held
before the alteration should equal the prospective reserve of the altered policy plus the
costs of alteration, C.