Alterations

Question 1

What is a boundary condition?

Answer 1

• The idea of a boundary condition is that some alterations are rather like other alterations, or to not altering the policy at all, or to taking out a new policy.
• Given that this is the case, the terms offered for one alteration should be consistent with the terms offered for another similar alteration.
• They should also be consistent with other ways in which the policyholder could achieve the same result.

Question 2

Principles to consider with boundary conditions.

Answer 2

Consistency
- premiums ( using current pricing basis ensures that premiums are consistent with new premiums)
- premiums depend on the surrender value available before the alteration or after the alteration.

Question 3

what principles to question to assess the suitability of an alteration. ( consider the scenario for suitability of the principles itself as well)

13 points

Answer 3

• PRE
• boundary conditions
• anti-selection
• lapse and re-entry
• affordability
• stability over time and duration
• fairness
• consistency of the SV given the alteration
• legislative and professional requirements
• ease to apply, document and explain
• Consistency with premium at start;
• is the cost of alteration allowed
• Initial expenses should be excluded in the new basis.
• consistency with auction values

Question 4

Boundary conditions for setting paid-up values

Answer 4

*Consistency
- Paid up value should be consistent with PRE
- SV before and after alteration should be consistent.
*The paid-up value should aim to leave the profit of the contract unchanged.
*It should be supported by Ast at date of conversion, on the basis of future expected experience.
*Should smooth to maturity value as it is paid up later in the term

Question 5

methods for calculating alterations

Answer 5

proportionate paid up
equating policy values

Question 6

proportionate paid up values suitability

Answer 6

Meeting the principles
Proportionate paid-up values are:
- Usually too high at short durations, because they do not allow for the high initial expenses.
- Tend to be too low at medium durations because no allowance is made for investment earnings.
- The method is unlikely to be consistent with surrender values.
- The method does have the virtue of being a very simple one to apply and explain to policyholders.

Question 7

how do you value the total profit from an altered product?

Answer 7

depends on the relationship
- between the method and basis used before alteration to value the policy to determine the released profit
- between the method and basis used after the alteration to value the policy to determine the expected profit to emerge over the remaining term

Question 8

Items to assume on the equating policy value methodology ( determining the basis)

Answer 8

• expenses ( renewal expense)
• mortality
• investment returns

Question 9

factors affecting the value of the expected profit to emerge over the remaining lifetime

Answer 9

0 if the realistic prospective policy value is used after alteration for the policy value
profit incoporated in the margins if the prospective policy value method allows for margins

Question 10

factors affecting the value of the released profit at alteration?

Answer 10

0 if the asset share is used
full if the realistic prospective policy value is used alteration
in-between if the prudent prospective method is used

Question 11

setting the basis for equating policy values

Answer 11

• choose basis strength( realistic or prudent)
• The choice between Select and Ultimate in the mortality assumption is likely to depend on whether medical evidence is required before the alteration is proceeded with.
  alteration expenses assumptions

Question 12

expand on stability

Answer 12

the stability of the method and the basis ( How frequent they are to change)
- e.g. if the ASt is used for the policy value, it depends on actual experience and thus the method is not stable.

Question 13

who should the alteration be fair to and fairness in terms of what?

Answer 13

• is the method fair?
• it should be fair
• to those that take the alteration, those that do not take on the alteration, and shareholders.
• profit sharing ( before the alteration) consider.

In terms of what?
the released profit values before alteration based on the basis and method.
- the value of the policy under different terms
-

Question 14

consistency

Answer 14

• is the alteration consistent with similar alterations by competitors
• premium rates on boundary conditions
• Surrender values depending on the method and the alteration.
• lapse and reentry
• anti-selection

Question 15

is the equating policy values approach and the ASt easy to calculate and explain?

Answer 15

Equating policy values will be difficult to explain to policyholders, who are
unlikely to be familiar with present value calculations or asset share
calculations.

ASt values are very volatile, may not be easy to document daily.

Question 16

How would you explain the affordability principle?

Answer 16

For the original pricing basis
if policy value > reserve, the policy appears more valuable(costly) than it really is, then the company will not retain the historic margins so that p/h do not end up paying more.
if the policy value< reserve, the policy appears cheaper than what is really is, then the company will retain the historic margins.

All the other points of profit released.