Alterations-various methods

[vikky]

Page 8 of the alterations chapter.
PUSA =basic SA *no of prems till date/no originally payable

The notes say pup values are usually too high at short durations.
DOnt follow this..surely the numerator in the above eqn will be very low so this would lead to a PUP SA that would be very Low at short durations!!DOnt know what am I missing here..
Am also struggling to understand how the respread,balance SA and Accumalation method works in the absence of numerical examples in the course notes..
...help !!!

 

[vikky]

???

 

[cjno1]

I don't have the notes handy, but I'm assuming you're talking about a proportional paid-up value.

In which case, if you think about the premiums that are charged, a customer will pay a flat premium over the term of the policy, and in that premium will be an allowance for all expenses (initial and renewal). But if we take a proportional paid-up value early on in the policy, then the customer may still be technically loss-making since the company hasn't recovered the initial expenses yet, so the paid-up value is too high.

Take a simple example, if initial expenses are £500 for a 25 year policy with sum assured £10000, and the annual premium is £300 then if we were to take a proportional paid-up value at the end of year one, we would give the customer a benefit of

(1/25) * 10000 = £400

However as you can see haven't actually repaid their initial expenses yet! So the paid up value should really be zero (since it can't be negative). This is an extreme example but it should illustrate the point.

 

[vikky]

I thought the paid up sa=NUMBER of prems paid/No payable *Original SA...
In regard to this I cant see how you get a high PUP SA at early durations

 

[cjno1]

I thought the paid up sa=NUMBER of prems paid/No payable *Original SA...
In regard to this I cant see how you get a high PUP SA at early durations

Exactly. In my example they had paid 1 premium out of 25, so I used 1/25. It's not a high SA per se, it's a high sum assured compared to the premiums which have been paid.

 

[Lynn Birchall]

Hi

For the proportionate paid-up value, I think cjno1's example illustrates the problem well.

So, the issue isn't that the PUP SA is "high" so much as "higher than it should be avoid the company making a loss as a result of the initial expenses".

For the accumulation of premium arrears/surplus method, hopefully this helps:

Consider a policyholder who originally bought a policy with a term of 3 years for which the premium is £20 per month.

Imagine that 1 year into the life of this policy, the policyholder contacts the insurance company to alter the policy to one with a smaller sum assured but the same maturity date.

The "accumulation" method says that the company should consider what the premium would have been if the policyholder had bought the policy with this smaller sum assured on the original policy start date (1 year ago). Imagine this premium would have been £18 per month.

We could say the policyholder has been "overpaying" by £2 per month. If we ignore interest and mortality (just to keep this example simple!) we could accumulate this to an overpayment pot of £24 at the date they want to alter the policy.

We then spread this £24 out to reduce the future premiums the policyholder will pay. At this point there are 2 years of the policy left so this reduces the future monthly premiums by £1 (again I'm ignoring interest and mortality in these numbers, which you wouldn't in practice). So, the new premium would be £17 per month.

For the surrender value respread method, there's a numerical example ( here ) that I'm hoping might help?

Hope these help clarify the methods a little
Best wishes
Lynn