Ch 21 Alterations to contracts

The notes on page 4 say that for with-profit, a retrospective reserve for the policy is determined and the surrender value is calculated using this.

However, shouldn’t we use the prospective reserve because we would need to set a surrender value taking account of future distribution of profits that would be declared under with-profit contracts? The second last paragraph on page 3 seems to support my case.

 

Ch21 - Alterations

As it says on page 4, there are two values you can look at at, either a retrospective or prospective value, and both could be considered reasonable.

For with-profits, assuming the aim is to pay out close to asset share, then a retrospective calculation is exactly aligned to this. Typically, any future bonuses would have been generated form the current asset share, so don't change things. However, if the current guaranteed benefits aren't supportable from the current asset share plus future premiums less expenses, then a prospective value of these cashflows might be considered more appropriate.

Where a prospective value is being used for with-profits, this will often be too low if just the current guaranteed benefits are considered. If further bonuses are expected in future, the value of these should be included. If these are expected to be determined from asset share calculations, then we're back to using something equivalent to asset share, so might as well just use the retrospective calculation above.

 

Surrender value respread to reduce future premiums

I have not understood the Surrender value respread to reduce future premiums method of altering contracts.

Suppose, the sum assured increases from S to S'. The premiums to be paid increase from P to P'. This is what point (i) in the core reading says.
So, PV P' = PV S'

Point (ii) says calculate a special surrender value of "existing" contract that makes allowance for intial expenses included in the prem in (i)
Q01 - does "existing" here refer to pre or post alteration?
pre-alt, SV = P.(adue.n) - e(adue.n) - S.A(term assurance factor) - I
post-alt, SV = P.(adue.n) - e(adue.n) - S.A(term assurance factor) - I

Point (iii) says reduce the premium by spreading the special SV over o/s term.
Q02 - Will the reduced premium be sufficient to pay the benefit?
i.e Will PV P' - SV spread = PV S'?

cheers

 

Thanks Mark.
Also had difficulty understanding the PUP pol val + Prem for balance of SA.

I'm trying to work with the help of the following:
Consider a policy with term = 10 years. SA = £1,200 (on death or survival). Premium payable = £100 p.a.

After 5 years the PUSA is £700. The policyholder wants to increase term by another 10 yrs.

Then, from the core-reading,
PUSA after change = £700x(Ratio of assurance factors)
PUSA after change = £1,500 (say).

Q01 Would we then find the premium for a policy with a sum assured of £800? (i.e. 1,500-700)

Q02 Suppose after the 5 year mark, if the PH holder wanted to keep the term unchanged but wanted to increase the sum assured from £1,200 to £2,000, would we then work out the premium for a policy with SA = £8,000 and term = 5 years?

Q03 Is the first bullet point under Meeting the Principles saying the following:
"If the benefit is unchanged and the term is unchanged, then we would end up with the paid-up value".

Q04 Is the third bullet point under Meeting the Principles saying the following:
"If the PUP value and the surrender value are calculated on the same basis & if the term "n" approaches "t" (where t is the date of alteration), then we would end up with the normal surrender value".

I know the last 2 questions are not very intelligent, but was wondering if my understanding is correct.
If it is, then could I use the bullet points as above, as I would be more comfortable in explaining how the principles are met in my own words rather than memorising the core reading.

Any help would be much appreciated.

Cheers
¦_____¦_____¦_____¦_____¦_____¦_____¦_____¦_____¦_____¦_____¦ P P P P P P* P* P* P*

 

Accumulation of premium arrears/ surplus
Would like to use the following example:
Consider a policy with term = 10 years. SA = £1,200 (on death or survival).
Premium payable = £100 p.a.

After 5 years the PH decides he wants a SA of £2,000 at the end of the next 5 years.
So, then the company would need to work out the premium for a policy with term = 10 years and SA = £2,000 (on death or survival).
The premium calculated works out to be = £125 p.a.

Q01 Is the method saying,
# Take the difference between the two premiums (100 & 125), -25 for each of the 5 previous years and accumulate it to the start of the 6th year.
# Then spread the accumulated value over the remaining 5 premiums of £125 payable from 6th year to 10th year?

Q02
a) Under "Meeting the principles", is the second bullet point saying that if the basis for calculating both premiums is the same then there would be consistency between surrender values and paid-up values (if SV's and PUP values also followed premium basis)?
b) Why does the second bullet point say we could ignore mortality and expenses?
c) Can the entire second bullet point be explained from first principles? Using equations?

As always, any help will be much appreciated.

Cheers

PLEASE TRY TO ANSWER POST #6 AS WELL

 

Hi,

For Accumulation of premium arrears/surplus method, 'Meeting the principle', point one, which says,' The method leaves the premium unchaged if the policy terms are unchanged. Hence good for small changes to duration or sum assured, particularly very near to entry.'

The method leaves the premium unchaged if the policy terms are unchanged. I wonder under what scenario this happens.

Many thanks.