22 - Contract Design (Discontinuance part) + Rayno's Flashcards Preview

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Flashcards in 22 - Contract Design (Discontinuance part) + Rayno's Deck (13)
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1
Q

Principles underlying the determination of the benefits payable on discontinuance or transfer of rights:

A

The amount offered on discontinuance should be fair to:
o The policyholder or scheme member
o Other policyholders and scheme members
o The provider of the benefits.

2
Q

Setting discontinuance terms for insurance contracts, the insurer should consider:

A
  • Which contracts to offer discontinuance terms on
  • Form of the benefits being offered
  • How it goes about setting the discontinuance terms
  • Practical considerations related to discontinuance
3
Q

Which contracts discontinuance terms are offered on may depend on:

A
  • Market practice
  • Regulatory requirements
  • Likelihood of selective withdrawals
  • Difficulty of assessing suitable terms
    eg. lump sum on discontinuance of an immediate annuity runs risk of paying an excessive lump sum based on an overly optimistic view of p/h expected lifetime
4
Q

The administration and costs of determining and implementing discontinuance terms include:

A
  • Cost of determining a calculation BASIS
  • COMPUTER systems development and maintenance costs
  • Costs of employing and TRAINING staff to deal with discontinuance quotations and subsequent queries / complaints
  • MARKETING literature costs
  • Losses incurred due to providing OVERLY GENEROUS discontinuance terms or due to errors in calculations
  • Cost of REVIEWING the discontinuance terms.
5
Q

In the context of life insurance, what forms can discontinuance take?

A
  • Surrender: Policy stops, no further cover, p/h receives lump sum from insurer
  • Lapse: Policy stops, no further cover, no payment made to p/h
  • Paid-up: Premium payment ceases, but a level of cover is still provided; benefits may be reduced to reflect that there are no more premiums paid

**Discontinuance terms calculations are guaranteed as part of the contract in some instances

6
Q

Key principles and factors to consider in determining discontinuance terms for life insurance contracts are:

A
  • What the policy is ‘WORTH’
  • Policyholder EXPECTATIONS
  • COMPETITIVE considerations.
7
Q

Policyholder expectations -: Discontinuance at short duration

A
  • Policyholder compare the lump-sum discontinuance benefit with the premiums paid, or even premiums plus some interest
  • Significant initial expenses make the lump-sum smaller than premiums paid or even negative eg. U/W, commissions, policy admin.
  • To cope with the expectation, insurer might penalise late surrender benefits to pay early surrenders
8
Q

Policyholder expectations -: Discontinuance close to maturity

A
  • Policyholder expects the lump sum payable on discontinuance just prior to maturity to be consistent with the maturity benefit
  • The lump sum should progress smoothly into the maturity value at the end of the contract
9
Q

Practical considerations related to discontinuance:

A

Ease of calculation: Actuary must balance need for simplicity with the requirement for fairness of discontinuance terms

Frequency of change: Discontinuance terms should not be changed too frequently to reduce:

  • Risk of not meeting p/h expectations
  • Costs of determining and implementing new terms.
10
Q

Benefits offered on discontinuance – general insurance contracts:

A
  • GI contracts usually last for 1 year
  • If the p/h pays an annual premium and wishes to discontinue the policy 6 months after, the insurer may pay out a lump sum discontinuance payment
  • The payment will reflect premiums for outstanding cover less admin fee
11
Q

When setting discontinuance terms for BENEFIT SCHEMES, it will be necessary to consider:

A
  • Form of the benefits being offered
  • How discontinuance terms might be set
  • How the funding level of the scheme might affect the discontinuance terms offered eg. 95% funding level pays out 95% value of warranted benefits OR transfer of benefits can be deferred
12
Q

Discontinuance terms for individuals in BENEFIT SCHEMES :- Form of the benefits being offered

A
  • For DC schemes, discontinuance benefits will reflect the member’s account on the date of withdrawal
  • For DB schemes, discontinuance benefits is based on the number of years’ service & salary at the date of withdrawal
  • Member moving from active to deferred status usually have options to:
    o Retain full discontinuance benefits within the scheme
    o Transfer value of benefits out of the scheme into a different arrangement
13
Q

Fairness consideration when setting discontinuance terms in benefit schemes:

A
  • If the discontinuance benefits are to be transferred to another provider, the benefits need to be valued
  • The value needs to be equitable between members who leave the scheme and members who stay in the scheme
  • Transfer pmt should equal expected cost of providing benefits within the original scheme