Chapter 26 : Alterations

Question 1

What principles need to be considered when looking at alterations?

Answer 1

SCRAAP FEES

Stability of basis before and after alteration
Consistency with boundary conditions (increase in benefits consistent with taking out new policy
Regulation and professional guidance
Anti-selection risk
Affordability
PRE

Fairness and reasonable amount of profit
Ease of calculation and administration
Ease of communication/explanation
Surrender value

Question 2

What are common alterations?

Answer 2

1. Change in the term of the assurance e.g. change from a whole-life assurance to a term assurance
2. Alter the sum assured
3. Alter the premium payable

Question 3

What is the proportionate paid-up values method?

Answer 3

Basic sum assured * number of premiums paid/number of total premium that would have been paid

Question 4

What are the advantages and disadvantages of the proportionate paid-up values method?

Answer 4

1. It is approximate and easy to calculate, but ease is not necessary with current computing power
2. Proportionate values are too high at early durations because they do not allow for high initial expenses. At medium durations it is too low because no allowance is made for investment earnings
3. The method is unlikely to be consistent with surrender values\
4. However the method is very simple and easy to explain to policyholders

Question 5

What is the equating policy values method

Answer 5

The value of the contract before alteration is equated to the prospective value of the contract afterwards

Question 6

What are the five methods of alterations?

Answer 6

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

Question 7

Does the equating values method meet the principles of an alteration?

Answer 7

SCRAAP FEES

Stability of basis - yes
Consistency with boundary - yes because same basis is used
Regulation?
Anti-selection risk (lapse, re-entry) 0 not avoided and company needs to check that premium is not more than new contract (given no initial expenses)
Affordability-due to consistent basis
PRE
Fairness
Ease of calc
Ease of explanation
Surrender value - The method is consistent with surrender values.