T_Policy Changes

Question 1

Surrender Value Principles

Answer 1

Principles to consider

• PRE (short durations, close to maturity, auction value)
• Comparison vs premiums paid and NB projections
• Comparison vs maturity values
• <= earned asset share in aggregate
• SV given by competitors
• Must not change frequently
• Ease of application
• Clear documentation
• Avoid anti-selection against insurer
• Surrender and re-entry
• Surrender Value on Unit Linked contracts –> bid value less penalty

Question 2

Calculating Surrender Values

Answer 2

Profit = Earned Asset share – Surrender Value

Question 3

SV Retrospective method

Answer 3

• Earned asset share at surrender date
• Max company can pay without loss
• Looks low at early durations
• Doesn’t consider profit company would have made – s/h / p/h equity?
• Won’t run into maturity value
• Can product values that are very different from prospective value and competitors
• Relatively easy to calculate if have past information
• No retention of profit

Question 4

SV Prospective method

Answer 4

What policy is worth to company (on realistic basis)

-May exceed earned asset share
-May look unreasonable to p/h early on
-Will run into maturity value
-Comparable across competitors if assumptions similar
-Easy to calculate since no requirement of past experience
-Profit depends between pricing basis and Surrender -Value basis as well as the following
>Interest
>Expenses
>Inflation
>Mortality

Question 5

Policy Alteration Overview

Answer 5

• Conversion to paid up
• Change in term, sum assured, premium

-Paid up sums assured requirements
>Supportable by earned asset share at conversion
>Consistent with maturity values (taking missing premiums into account)
>Surrender Value before and after conversion similar

-Unit Linked
>PUP – units stay attached (possibly deduct penalty)
>Premium and/or Sum Assured increases/decreases
>Changes in retirement date

Question 6

Key Alteration Principles

Answer 6

Terms after alteration to be supportable by earned asset share at date of alteration

Surrender – limiting case in reduction of term

PUP conversion – limiting case in reduction of sum assured

New policy premium – similar to premium for benefit increase

Same premium if altered to self excl expenses (stability)

Avoid lapse and re-entry

Benefit increase should require underwriting

Recover cost of alteration (affordability)

Ease of calculation

Question 7

Key Alteration Principles - boundary conditions

Answer 7

Surrender – limiting case in reduction of term

PUP conversion – limiting case in reduction of sum assured

New policy premium – similar to premium for benefit increase

Question 8

Policy Alteration Methods

Answer 8

Consider Alteration Principles when assessing methods

Proportionate paid-up values
Equating policy values
Reserve before = Reserve after + Cost of Alteration
Surrender Value re-spread to reduce future premiums (not for PUP conversions)
Paid-up policy value plus premium for balance of sum assured
Accumulation of premium arrears/surplus (not for PUP conversions)

Profit depends on bases and terms used in setting alterations
Consider each method in turn