Chapter 26 - Alterations Flashcards

1
Q

What are the alterations available on a conventional without-profits contract

A
  • making the policy go PAID-UP
  • Change the TERM of an assurance
  • Alter the SUM assured
  • Alter the PREMIUM payable
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2
Q

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

A
  • 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
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3
Q

What principles should be considered when determining how to calculate paid-up sums assured

A
  • 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
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4
Q

What should the profit expected after alteration be

A

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

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5
Q

Boundary condition on surrender value

A

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

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6
Q

Boundary case on paid-up status

A

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

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7
Q

Boundary case on benefits to be increased

A

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

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8
Q

In assessing an alteration method, the principles we judge it against include:

A

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
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9
Q

What is the method of calculating the proportionate paid-up values for without-profits endowment

A

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

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10
Q

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

A

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

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11
Q

What are the methods of calculating alteration vlaues

A
  • Proportionate paid-up values
  • Equating policy values
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12
Q

What is the method of equating policy values to calculate alteration values

A

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

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13
Q

Determining the basis for equating policy values method

A
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14
Q

The total profit expected from an altered contract depends on the relationship between?

A
  • 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
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15
Q

The profit ‘released’ at the date of alteration will be

A
  • 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
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16
Q

The profit expected to emerge, from the date of alteration, over the remaining life of the altered contract will be

A
  • No profit at all, if a realistic prospective value is used for the policy value after alteration
  • Profit corresponding to the margins in the assumptions, if a prospective value using a basis incorporating margins is used for the policy value after alteration