T_Short q's 3

Question 1

How to set expense assumption (e.g. for prospective GPV)

Answer 1

Expenses
Consider most recent expense investigation for renewal expenses
May well be the same as those used to set current premium rates
Allowance also needs to be made for the expenses involved in surrendering the policy
Renewal commission could be allowed for as paid

Question 2

How to set inflation assumption (e.g. for prospective GPV)

Answer 2

Inflation
Chosen to be consistent with the investment return assumption
Consider real return anticipated on index-linked government stock to give an indication of expected inflation

Question 3

How to set interest assumption (e.g. for prospective GPV)

Answer 3

Interest
This will be the most important assumption
A company might consider the current weighted average redemption yield of suitable securities to be its best estimate assumption
It may also consider the interest rate used in the premium basis if it wishes to use a blended basis

Question 4

The following are principles that apply to all alterations

• Lapse and re-entry risk

Answer 4

 The premium on the altered policy is by definition less than the premium for a new policy with the same sum assured, which limits the lapse and re-entry risk.

Question 5

Principles for surrenders:

Answer 5

1 Feasibility
2 Affordability
3 The company should treat withdrawing and continuing policyholders equitably
4 The values should be consistent with policyholder’s reasonable expectations (PRE).
5 Practical Issues

Question 6

The following are principles that apply to all alterations

• Competition

Answer 6

 Premiums calculated under this basis, should be compared for competitiveness in the market – it the company wishes to be competitive with respect to such alterations.

Question 7

The following are principles that apply to all alterations

• Ease of administrating and communication

Answer 7

 It could be argued that this basis is not excessively complicated to calculate(given that it uses the existing SV).
 However, it may be difficult to explain to policyholders.

Question 8

The following are principles that apply to all alterations

• Frequency of changes

Answer 8

 The basis only changes when new business premium rates change (which should not be very frequent).

Question 9

The following are principles that apply to all alterations

• PRE

Answer 9

 Early on the SV is zero, which means that the policyholder essentially just buys a new policy.
 Policyholders may find this unacceptable.

Question 10

Principles for surrenders:

• The values should be consistent with policyholder’s reasonable expectations (PRE).
This could include:

Answer 10

o consistency with quotations at outset
o reasonableness of early surrender values relative to premiums paid (or premiums plus some interest)
o running smoothly into maturity values (which may on occasion involve paying more than asset share – which should only be done where absolutely necessary owing to the principle of affordability)
o having regard to competition and auction values (if any)