Chapter 26 - Alterations Flashcards
Why might the basis used for paid-up policies different than surrender value
- costs of making pol PUP not equal to costs of paying SV
- may be less mortality selection effect, because PH keeps pol in force
State the three principles that should be considered when calculating the paid-up sum assured
- Be supported by earned asset share on the date of conversion
- At later durations be consistent with the projected maturity values allowing for premiums not received
- Be consistent with surrender values so that surrender before and after the conversion is approximately equal
Give 7 principles that should guide the calculation of terms to offer under general policy alterations
- Surrender can be viewed as the limiting case of a reduction in policy term. Therefore, the company will wish that, as the outstanding term tends to zero, the premiums charged look consistent with the difference between the surrender value and the maturity value.
- A conversion to paid-up status can be viewed as the limiting case of a reduction in sum assured. So, apart from any differences in expenses to be incurred, the premium after alteration should approach zero as the sum assured approaches the paid-up sum assured.
- If the benefits are to be increased, this should be on terms consistent with the additional premium which would be charged for a new policy with a sum assured equal to the proposed increase. If the term is to be extended the terms should reflect the current premium basis so far as the period of extension is concerned.
- Any methods adopted should be stable in that small changes in benefits should result in small changes in premium, if expenses of alteration are ignored. In other words, an alteration method should ideally reproduce the existing terms if a policy is altered to itself.
- The terms offered after alteration should avoid the option of lapse and re-entry.
- Any increase in benefit may be subject to additional evidence of health, depending in part on the scale of the alteration and when it occurs in the policy’s lifetime.
- The costs associated with carrying out an alteration should be recovered.
What 2 broad methods do we have to calculate alteration terms?
Proportionate paid up values
* approximate method
* can be used to simplify calculation of PUP values
Equating of policy values
* most accurate method
What is the overriding method used when calculating terms for policy alterations using equating of policy values?
- Value of 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.
- The method can essentially be used for any type of alteration, including conversion to paid up status
- The alteration terms can be made appropriate in almost all circumstances, provided appropriate bases are chosen
In terms of meeting the principles that should be followed when calculating alteration terms, outline the main advantages (5) and disadvantages (1) of equating policy values to calculate alteration terms.
Advantages
- Will produce consistent surrender values before and after alteration if the same methods and assumptions are used as for calculating surrender values
- For an extension of term or increase in benefit, use of the current premium basis to calculate the before and after alteration policy values would ensure consistency with the terms for new contracts (unclear if other bases would)
- There will be consistency between the terms for alterations, surrender values and conversions to paid-up status, if the same bases are used
- Assuming the same basis is used for before and after policy values, the method is stable
- Provided the policy value before alteration isn’t greater than the earned asset share, and the basis for the policy values after alteration is not weaker than a best estimate basis, the alteration terms should be affordable.
Disadvantages
- Lapse and re-entry may be possible - the company would need to check the revised premium against that for a completely new contract
Give a brief overview of what factors to consider when determining the basis used for setting alteration terms
No assumptions are required for the proportionate paid up approach
- We need a set of assumptions for equating policy values, and should consider the following:
- The expected profit from the altered contract
- What kind of assumptions to use
- Impact of selection
What does the total profit from an altered contract depend on? (2)
- the method and basis for calculating the policy value before alteration, which determines profit “released” at time of alteration
- the method and basis for calculating policy value after alteration, which determines the profit expected to emerge over remaining contract term
What profit will be “released” at alteration date for the various bases used for the policy value before alteration? (3)
- full expected profit under unaltered policy, if realistic/best estimate prospective val used for policy value before alteration
- no profit at all, if earned asset share is used for policy value before alteration
- something between, if prospective value using a basis incorporating margins is used for policy value before alteration
What profit will be expected to emerge from the alteration date, over the remaining life of the altered contract, for the various bases used for the policy value after alteration (2)
- no profit at all, if realistic prospective value used for policy value after alteration
- profit corresponding to margins in assumptions, if prospective value using a basis incorporating margins is used for policy value after alteration
What are the 6 principles that we should judge when assessing alteration methods
- affordability
- consistency with boundary conditions
- stability
- avoidance of lapse and re-entry
- fairness - in terms of extracting a suitable amount of profit from a contract
- ease of calculation and explanation to policyholder
