Chapter 26

Question 1

How do the assumptions and calculations of a paid up sum assured differ from that of a surrender value? (4)

Answer 1

• Mortality worse than SV
• Cost of making a policy paid up not the same as cost of paying a surrender value (time value of when the SA will be paid out, PU= admin costs that wont be recouped by future prems)
• renewal expenses continue
• renewal commission not included in valuation compared to SV

Question 2

List the principles of alterations for without profits business excluding PUSAs (10)

Answer 2

• Supportable by earned asset share @date of alteration to avoiding losses
• E(profit after alteration) = E(profit before alteration)
• stability = ignoring expenses, small changes in benefits must lead to small changes in premiums
• avoid the option of lapse and re-entry
• increases in benefit may be subject to EoH
• costs of carrying out alteration must be recovered
• affordability
• consistency with boundary conditions
• ease of calculation and explanation to policyholder
• fairness i.t.o. extracting a suitable amount of profit from the altered policy

Question 3

List the principles of a PUSA (13)

Answer 3

Everything for surrender values (PRE, ASt, disclosure of new business, clear documentation, ease of calculation, early duration stuff vs close to maturity, competition, selective withdrawals, lapse+entry, equity)
* must be supported by ASt = meaning that the future premiums + ASt @ date of conversion must be enough to pay the benefit and expenses
* at later durations, be consistent with projected maturity values, allowing for prems not received
* consistent with SV, s.t. SV before and after conversion are approximately =

Question 4

Describe the methods of calculating alteration terms, including advantages and disadvantages) (6+5)

Answer 4

Proportionate PUSA:
PUSA= SA x (#prems paid/# prems payable)
Advantages
* simple to calculate
* easy to explain to policyholder
Disadvantages
* only for paid up policies
* too high at early durations (doesn’t allow for initial expenses)
* too low at later durations (ignored investment earnings)

Equating policy values:
For PUSA: value of old policy @alteration date = SVt
For general alterations: Value of old policy= Value of new policy+cost of alteration =>
Value(old)+value(new premiums)=vale(new benefits)+ value(new expenses) + cost of alteration
Advantages:
* consistent with SV if same basis used
* stable
* affordable if value after alteration isn’t>EAS and basis basis isnt weaker than BE
Disadvantage:
* cant ensure no lapse and re-entry, you would just have to ensure that the new premium isnt greater than that of a new policy