Contract boundaries

[Mbotha]

One of the contract boundaries is "the point at which premiums/benefits can be changed in such a way that they fully reflect the risks". Do reviewable
premiums fall into this category? And if not, what type of situations does this apply to?

 

[Lindsay Smitherman]

Yes they do, provided there are not any restrictions on the extent to which the reviewable premiums can be changed.

 

[Viki2010]

Hi Lindsay, can I please clarify what sort of products would typically come with CONTRACT BOUNDARIES?

I would normally think of UL products, is that right?
The CMP mentions " Contract boundary for an Endowment with a GAO is the end of the annuity and not the maturity date of the endowment", so suggesting also Endowments with GAOs.
The mini ASET states that the deferred and immediate annuities would not come with contract boundaries.

 

[Lindsay Smitherman]

UL products only have contract boundaries if the charges are completely reviewable so that they fully reflect the inherent risks. The whole issue about whether certain UK UL contracts do or do not have contract boundaries is one which is not particularly well resolved yet, so if you are looking for an example I would stick with the one that has been raised earlier in this thread, ie a contract with reviewable premiums such as a particular design of whole life assurance or term assurance where the premium rates are fully reviewable every ten years, say.

Contract boundaries means that future premiums payable after that boundary are not included in the BEL. Therefore the concept has no meaning for single premium business, on which there are no future premiums. So immediate annuities, which are single premium, do not have a contract boundary. Deferred annuities tend to be written on a conventional without profits basis, with fixed premiums, and hence there are no contract boundaries as the premiums cannot be reviewed and the product cannot be terminated unilaterally by the company.

 

[wkornu]

Contract boundaries means that future premiums payable after that boundary are not included in the BEL.

So would the future outgoes (expected claims and expenses) not be included in the BEL beyond the contract boundary as well?

 

[Em Francis]

So would the future outgoes (expected claims and expenses) not be included in the BEL beyond the contract boundary as well?

Contract boundaries are imposed on the premium and any obligations relating to them. So I would say that claims past the boundary would not be included in BEL if they do not relate to the premiums within the contract boundary.
Hope this helps.
Thanks
Em

 

[MLC]

I'm a bit unclear why contract boundaries were put in place for SII? Is it a prudence assumption? This makes sense in the case of a policy with fully reviewable premiums as this prevents the insurer significantly raising premiums and taking credit for these when the policy holder may lapse.

However under SII we have to make BE assumptions on lapses so why wouldn't we continue to do this at and past the contract boundary (even if this meant we had to assume lapse where high e.g. 90%)?

Thanks,

Max

 

[Harleen Anand]

can u explain these "Contract boundaries are imposed on the premium and any obligations relating to them? So I would say that claims past the boundary would not be included in BEL if they do not relate to the premiums within the contract boundary." through a numerical example. I am still very confused

 

[Em Francis]

can u explain these "Contract boundaries are imposed on the premium and any obligations relating to them? So I would say that claims past the boundary would not be included in BEL if they do not relate to the premiums within the contract boundary." through a numerical example. I am still very confused

Hi Harleen

'Contract boundaries are imposed on the premium and any obligations relating to them': An example of such obligations would be from claims relating to life cover paid for by those future premiums. Any expected claims paid for by the premiums within the boundary would be included. However, if there was an option to extend or convert cover past the contract boundary, this new liability would not be included.

Please be mindful that the CR doesn't provide too much detail around Contract Boundaries, and so you wouldn't be expected to know more detail than what is provided.
Thanks
Em

 

[VishalKumar]

So what will be the CB for a health insurance policy with 10 years policy term and annual regular premium which will be reviewed by the insurer.
I am expecting to project full 10 years for all benefit and expense outdoes and none for premium?

 

[Em Francis]

So what will be the CB for a health insurance policy with 10 years policy term and annual regular premium which will be reviewed by the insurer.
I am expecting to project full 10 years for all benefit and expense outdoes and none for premium?

Hi

If the premiums are reviewed annually so that they fully reflect the inherent risks (which for a health insurance contract would include mortality and morbidity risks) then, yes, it could be said that the contract boundary is at the review date and no cashflows are considered in the BEL beyond this. However, if the premiums are increased in line with increase in expenses only, ie expense inflation, then it could be argued that this is not reflecting all risks, implying there would be no such contract boundary.

Hope this helps.

 

[VishalKumar]

Thanks EM,it clear many of my doubts re CB!
Just to confirm for first case where premium is reviewed for mortality/morbidity benefits, outgoes and income are projected till premium reviewable date say 1 year and where premium is increased due to expense inflation,outgoes and income projected till end of policy term ie 10 yrs in our example.

 

[Em Francis]

Thanks EM,it clear many of my doubts re CB!
Just to confirm for first case where premium is reviewed for mortality/morbidity benefits, outgoes and income are projected till premium reviewable date say 1 year and where premium is increased due to expense inflation,outgoes and income projected till end of policy term ie 10 yrs in our example.

If premiums are not reviewed to fully reflect risks then yes all cashflows would be modelled for the 10 years. If they are, the modelling would only take into account one years worth of cashflows, ie up to the contract boundary.