Chapter 26 - Alterations Flashcards
What are the alterations available on a conventional without-profits contract
- making the policy go PAID-UP
- Change the TERM of an assurance
- Alter the SUM assured
- Alter the PREMIUM payable
What are the two considerations that might make the bases used for the calculation of paid-up values slightly different from the bases used for surrender values
- The COSTS of making a policy paid-up may be different from those of paying a surrender value
- Because the policyholder continues to have a policy in force, the effect of MORTALITY SELECTION may be less than when policies are surrendered
What principles should be considered when determining how to calculate paid-up sums assured
- 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
What should the profit expected after alteration be
It should be the same as that before, or alternatively, the same as the expected amount had the policy been written originally on its altered terms
Boundary condition on surrender value
Surrender can be viewed as the limiting case of a reduction in policy term.
So as the outstanding term tends to zero, the premiums charged look consistent with the difference between the surrender value and the maturity value
Boundary case on paid-up status
A conversion to paid-up status can be viewed as the limiting case of a reduction in sum assured.
Hence, the premium after alteration should approach zero as the sum assured approaches the paid-up sum assured
Boundary case on benefits to be increased
This should be consistent with the additional premium which would be charged for a new policy with a sum assured equal to the proposed increase
In assessing an alteration method, the principles we judge it against include:
MAP CAFES
- MANAGES anti-selection risk
- AFFORDABILITY
- POLICYHOLDER reasonable expectations
- CONSISTENCY with boundary conditions, eg surrender, paid-up, new policy
- AVOIDANCE of lapse and re-entry
- FAIRNESS between shareholders and policyholders and reasonable amount of profit
- EASE of calculation and of explanation to the policyholder
- STABILITY
What is the method of calculating the proportionate paid-up values for without-profits endowment
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
At what duration would you expect it to be possible to offer a paid-up value for the policy without suffering a loss compared to when a surrender value is offered
Later than when the surrender value is offered. This is because with a paid-up policy, renewal expenses continue (unlike with a surrender). This means that a policy will not support a paid-up value until some time after it supports a surrender value
What are the methods of calculating alteration vlaues
- Proportionate paid-up values
- Equating policy values
What is the method of equating policy values to calculate alteration values
The value of the contract before alteration, on a prospective or retrospective basis, can be equated to a prospective value after alteration that takes into account the requested changes to the terms of the contract
Determining the basis for equating policy values method
The total profit expected from an altered contract depends on the relationship between?
- The method and basis for calculating the policy value before alteration, which determines the profit ‘released’ at the time of alteration
- The method and basis for calculating the policy value after alteration, which determines the profit that is expected to emerge over the remaining term of the contract
The profit ‘released’ at the date of alteration will be
- The full expected profit under the unaltered contract, if a realistic prospective value is used for the policy value before alteration
- No profit at all, if an earned asset share is used for the policy value before alteration
- Something in between, if a prospective value using a basis incorporating margins is used for the policy value before alteration