Part 8 Flashcards
Discontinuance in life insurance context
- Surrender – the policy stops, there is no further cover and the policyholder receives a lump sum payment (the surrender value)
- Lapse – the policy tops, there is no further cover and no payment is made to the policyholder by the insurance company
- Paid-up – here the policyholder ceases to pay premiums but the policy continues to offer the policyholder some cover
Key principles to consider in determining discountinuance terms for life insurance contracts
- Asset share
- Accumulation of premiums with investment return
- minus expenses
- minus cost of cover (contribution the policy needs to make towards the claims arising on the porftolio of similar policies)
- Policyholder expectations
- Competitive considerations
- Practical considerations
Consequences if benefit scheme is in deficit
Either
- Some (or all) of the membes will have to accept a reduced benefit
- the sponsor will (if possible) be required to make up the deficit
Discontinuance liabilities for benefit scheme, in order of priority
- Expenses
- Pensions in payment
- Members’ voluntary savings
- Early leavers’ benefits + Benefits for active members
Key assumptions to make to value the benefits from an employer-sponsored medical benefits scheme.
- Dicsount rate
- Inflation of medical benefits (may be higher than price inflation)
- Incidence of sickness and likely duration of illnessm split by age, sex and different types of illnesses
- Mortality rates
- Discontinuance rates
- Future entry rates to the scheme and likely enrty age/sex employees
Pros and cons of prescribing assumptions for valuing benefit scheme by legislation
- ensures consistency between different schemes
- ensures consistency between actuaries
- ensures consistency over time
- may aim to ensure appropriate assumptions are used
- the assumptions may not be suitable for valuing all schemes
- the assumptions may become outdated over time
- it takes time to change regulation so it can be difficult to ensure the assumptions are up-to-date
Pros and cons of allowing actuarial judgment with disclosure for setting assumptions for benefit scheme
- allows actuaries to include factors that are specific to the individual schems
- allows actuaries to exercise their professional judgement
- can easily be updated over time
- the requirement for disclosure ensures accountability
- assumptions may not be appropriate and may be manipulated
- there will be costs if the regulator checks the appropriateness of the assumptions used
10-year annual premium term assurance policy for a group of lives aged 40.
Prospective net permium reserve immediately befor 6th premium is due
Net premium for 10-year annual premium term assurance policy to a group of 40 years old
Chain ladder
- Produce table of cumulative claims payments
- determine the development factors for successive development years
- Use the development factors to project the cumulative claims payments
- determine the outstanding claims reserves by subtracting, for each accident year, the claims paid to date (leading diagonal figures) from the total projected claims (last column figures)
Value of a death-in-service benefit of 4 x salary at dat of death for a member aged 30 exactly (ignore expenses). Normal retirement age is 60.
Define going-concern basis
The accounting basis normally required for an insurer’s published accounts, that is based on the assumption tht the insurer will continue to trade as normal for the long-term future
Define break-up basis
A valuation basis that assumes that the writing of new business ceases and cover on current policies is terminated. Current policyholders would normally be entitled to a proportionate return of the original gross premium. Deferred acquisition costs would probably have to be written off. Also known as a wind-up basis.
Examples of how the assumptions of the valuation might differ according to whether a going concern or a break-up basis is being used include:
- Discount rate used to value future cash flows – more likely to use longer-term investment assumptions for a going concern valuation
- Expenses – For a break up valuation, the future liability cash flows will need to include the expenses associated with discontinuing or terminating the business
- Discontinuance rate assumptions – withdrawals might be assumed to increase if a provider breaks up as customers become worried about the security of their benefits
Two main approaches to carrying out a valuation of assets and liabilities
- the discounted cash flow approach
- the market-related approach
Setting the discount rate under 4 methods
