CHP 34 Flashcards
General principles underlying the determination of discontinuance terms for benefit schemes
The key principle is fairness between different parties involved.
The principles underlying the determination of the benefits payable on discontinuance or transfer of rights should be fair to:
• The policyholder or scheme member
• Other policyholders and scheme members
• Provider of the benefits.
1.2. Determining the contracts for which to offer discontinuance terms
An insurance company needs to decide the contracts for which it will offer discontinuance terms. This may be governed by:
• Market practice
• Regulatory requirements
• The difficulty of assessing suitable terms – e.g. lump sum to pay on discontinuance of immediate annuity
1.3. The form of the dsicontinuance benefits offered
The discontinuance terms could take the form of a lump sum payment or converting the contract to paid up.
For some contracts, the discontinuance terms could be guaranteed.
1.4. Setting the discontinuance benefit
The key principle and factor to consider in determining discontinuance terms for life insurance contracts are:
• Asset share
• Policyholder expectation
Policyholder expectation – at short duration: initially policyholders will compare discontinuance with premiums paid, at this stage, this will not be what the company can offer. The company may decide to take a loss on early surrenders and recoup some of this from later surrenders.
Policyholder expectation – close to maturity: here the policyholder will compare to maturity benefits.
• Competitive considerations
Policyholder expectation discontinuance – at short duration:
initially policyholders will compare discontinuance with premiums paid, at this stage, this will not be what the company can offer. The company may decide to take a loss on early surrenders and recoup some of this from later surrenders.
Policyholder expectation discontinuance – close to maturity:
here the policyholder will compare to maturity benefits.
New business disclosures discontinuance
Disclosure at new business stage could be regulated and must contain certain information. This could contain information on discontinuance. This could influence the extent that policies terminating later on subsidise the benefits offered on short duration discontinuance.
Cost of implementation discontinuance
Consider the cost involved in determining and implementing the terms, compared to the benefit available on discontinuance.
1.5. Practical considerations discontinuance
New business disclosures
Ease of calculation
Cost of implementation
Frequency of change of discontinuance terms
2.3. Setting the discontinuance benefits
For benefit schemes the benefits on discontinuance are likely to be known, but if they are to be transferred to another provider a value will need to be placed on them. This value will need to be equitable between the members who stay and those who withdraw.
2.4. Other considerations discontinuance
Schemes may not be fully funded. The assets available to provide the benefits may be only those that are funded, they may be insufficient to provide the full value of benefits to all members. In such cases, the benefit paid to members leaving may be lower to reflect the lower level of funding. In such cases the member may have the option not to transfer away but retain the full discontinuance benefit in the scheme.
- Insolvency and closure – insurance companies
3. 1. Regulation
Because insurance companies are usually subject to regulations, they are usually required to keep solvency capital.
There are also regular reporting requirements that enable the regulator to monitor the financial position. These are designed to enable the regulator to intervene if need be.
- Insolvency and closure – insurance companies
3. 2. Intervention
Because of intervention, insurers rarely become insolvent. If the insurer breaches the required level of solvency capital, the regulator intervenes to protect the interests of existing and new clients.
If the situation is serious, the regulator will close the company to new business so that policyholders don’t enter a fund whose solvency is in doubt.
In most cases, the company will be required to establish a recovery plan and will be monitored closely by the regulator.
Stopping new business, the provider will still have existing liabilities but will have more capital freed up that would have been tied up financing new business strain. This plus the cost saving of not writing new business will enable the insurer to meet liabilities in the short run.
In the long run, diseconomies of scale will bite and further actions will be needed. The insurer may be sold or merged with another insurer who will take on its liabilities.
- Insolvency and closure – insurance companies
3. 3. Projecting solvency
In any of these scenarios, it is important to project the insurer’s solvency position into the future on a range of deterministic scenarios or with the aid of a stochastic model.
It is important to estimate the actions that might need to be taken in various scenarios, include these in the model.
- Insolvency and closure – insurance companies
3. 4. Compensation schemes
When the insurer cannot meet its liabilities (as opposed to not having enough solvency capital) and a buyer cannot be found to take them on, there may be a statutory scheme set up form which some or all of the benefit payments are paid.
Such a scheme is usually funded by a levy on all other providers.