Chapter 26 - Alterations

Question 1

Outline the key principles which should be followed by the company in setting terms for policy alterations [4]

2016_S2

Answer 1

• A key principle is that terms after alteration should be supportable by the earned asset share at the date of alteration so as to avoid the company making a loss.
• The profit expected from the contract after alteration should be appropriate
• e.g. if small change, then same profit as before the alteration, big change, then bigger change to profit in other words the method should be fair in terms of extracting a suitable amount of profit from the altered policy.
• Should take into account ‘boundary conditions’ i.e. should consider which alterations are similar, and then terms offered should be similar/consistent between those alterations.
• At later durations, be consistent with projected maturity values, allowing for premiums not yet received
• Be consistent with surrender values, so that surrender values pre- and post-alteration are approximately equal
• Method adopted should be stable in that small changes in benefits should result in small changes in premium (ignoring expenses of the alteration).
• Terms offered should avoid lapse and re-entry.
• Any increase in benefit may be subject to additional evidence of health (depending on scale of change and when it occurs in policy’s lifetime).
• The costs associated with carrying out the alteration should be recovered.
• Method should be easy to calculate and to explain to policyholders.
• The method should consider potential for selection against the insurer, and allow for this in the basis, or disallow such alterations.

Question 2

List the principles that should be considered in determining the methodology for policy alterations [4]

Answer 2

Considerations for the methodology for determining alterations:

• Affordability
• Fairness between shareholders and policyholders and reasonable amount of profit
• Manages anti-selection risk
• Policyholder reasonable expectations (PRE)
• Consistency with boundary conditions
• Stability (including over time and duration)
• Alterations terms used by competitors
• Ease of administration and calculation and documentation
• Ease of explanation to policyholders
• The method should be allowed by regulation and professional guidance