Chapter 26 - Alterations

Question 1

2 considerations that may make the bases used for calculation of paid up values different than bases used for surrender value calculation:

Answer 1

1. The cost of making a policy paid up may be different from those of paying a surrender value
2. PH continues to have a policy i force. The effect of mortality selection may be less than when policies are surrendered

Question 2

3 examples of common policy alterations are:

Answer 2

1. To change the term of an assurance, would include changing a whole life insurance to an endowment assurance
2. Alter sum assured
3. Alter premium payable

Question 3

Principles to consider when calculating paid-up sum assured: (3)

Answer 3

Paid up sum assured should:

1. Be supported by the earned asset share at the date of conversion on the basis of expected future experience
2. At later durations, be consistent with projected maturity values, allowing for premiums not received
3. Be consistent with surrender values, so that the surrender values before and after conversion are approximately equal

Question 4

When assessing an alteration method, the principles we might judge it against include: (6)

Answer 4

1. Affordability
2. Consistency with boundary conditions
3. Stability ( small change in prm = small change in benefit)
4. Avoidance of lapse and re-entry
5. Fairness in terms of extracting a suitable amount of profit from the altered policy
6. Ease of calculation and of explanation to the PH
7. Cost associated with carrying out the alteration should be recovered
8. Anybincrease in benefit may be subject to additional evidence if health, depending in part in the scale of the alteration and when it occurs in the policy’s lifetime

Question 5

Total profit expected from an altered contract depends on the relationship between: (2)

Answer 5

1. The method and basis for calculating the policy value before alteration, which determines the profit ‘released’ at the time of alteration, and
2. The method and basis for calculating the policy value after alteration, which determines the profit that is expected to emerge over the remaining term of the contract

Question 6

The proft released at the date of alteration will be: (3)

Answer 6

1. Full expected profit under the unaltered contract, if a realistic prospective value is used for the policy value before alteration
2. No profit at all, if an earned asset share is used for the policy value before alteration
3. Something in between, if a prospective value using a basis incorporating margins is used for the policy value before alteration

Question 7

Profit expected to emerge, from the date of alteration, over the remaining life of the altered contract will be: (2)

Answer 7

1. No profit at all, if a realistic prospective value is used for the policy value after alteration
2. Profit corresponding to the margins in the assumptions, if a prospective value using a basis incorporating margins is used for the policy value after alteration

Question 8

Disadvantages of using the proportionate paid up value approach as an alteration method: (3)

Answer 8

1. Paid up value will be too high at early durations
2. It will be too low at medium durations, because no allowance is made for investment return
3. Unlikely to be consistent with surrender values