Chapter 34: Discontinuance

Question 1

Underlying principle to consider in setting discontinuance terms

Answer 1

Fairness between:

• the policyholder or the member who is leaving and
• the other policyholders
• the provider of the benefits

Question 2

How do you decide on which contracts to offer discontinuance terms?

Answer 2

By looking at

• market practice
• regulatory requirements
• the difficulty and cost of assessing and implementing suitable terms

Question 3

What forms might the discontinuance benefits take?

Answer 3

A lump sum benefit

or a conversion to paid-up status

Question 4

When an individual terminates a life insurance contract, what are the main factors to consider when determining suitable discontinuance terms?

Answer 4

• Policyholder expectations
• Smoothing discontinuance benefits over time
• information previously disclosed to policyholders
• competition
• simplicity
• allowing for administration expenses
  The starting point for the calculation is the asset share of the contract.

Question 5

Can you describe policyholder expectations in relation to:

life insurance discontinuance benefits

Answer 5

Near the start of the contract, policyholders would expect a return of premiums, possibly with some interest.
Towards the end of the contract, policyholders would expect discontinuance benefits to run smoothly into the maturity value.

Question 6

When an individual leaves a pension scheme, what are the main factors to consider in determining suitable discontinuance terms?

Answer 6

• Fairness between those leaving and those staying
• The rights and expectations of those continuing members
• Whether the member wants to stay in the scheme as a deferred member, or take a transfer value to another scheme
• the level of funding in the scheme at the point of discontinuance
• information previously disclosed to members
• simplicity
• allowing for administration expenses

Question 7

Can you describe policyholder expectations in relation to:

pension scheme discontinuance benefits

Answer 7

There expectations will be based on the benefits that would have been paid, had they not left active membership of the scheme.

Question 8

Why do insurers rarely become insolvent?

Answer 8

They are required by the regulators to hold a certain amount of solvency capital.

There are regulatory checks on the solvency position, and the regulator is likely to intervene before the situation reaches crisis point. E.g. the regulator might require the insurer to:

• – close to new business,
• – make cost savings,
• – change the assets held or
• – use reinsurance.

Insolvency may also be avoided through mergers or acquisition.

Question 9

If the insurer does fail, how might policyholders be protected?

Answer 9

Through a statutory compensation scheme funded via a levy on providers.

Question 10

What are the 3 most important factors for the sponsor to consider on discontinuance of an entire benefit scheme?

Answer 10

• the rights of the members, which depend on legislation and scheme rules
• the expectations of the members, which are likely to be based on the benefits that would have been paid had the scheme not been discontinued
• the funding level of the scheme

Question 11

What might happen if the scheme is in deficit on the discontinuance date?

Answer 11

• benefits paid to members my be reduced
• there may be a requirement on the sponsor to put in extra funds
• alternatively, legislation may require a debt to be placed on the sponsor.
• the scheme may have insurance to ensure the sufficiency of assets on insolvency of the sponsor
• if the member’s benefits are reduced, legislation may dictate the priority ordering of the reduction in benefits.

Question 12

What might happen if the scheme is in surplus on the discontinuance date?

Answer 12

• the surplus might be used to increase benefits
• or be passed back to the sponsor.

Consideration will need to be given to legislation and the scheme rules.
The allocation of surplus to beneficiaries may be done on length of membership or on the extent to which members are thought to have contributed to the surplus.

Question 13

6 Options for providing outstanding benefits if a scheme is discontinued

Answer 13

• continuation of a scheme without any further accrual of benefits
• transfer of the liabilities to another scheme with the same employer
• transfer of the funds to the beneficiary to place with an appropriate insurance company or in the scheme of any new employer
• transfer of the funds to an insurance company to invest and provide a benefit
• transfer of the liabilities to an insurance company to guarantee to pay a specified level of benefits
• a statutory compensation scheme funded by a levy on providers

Question 14

Factors to consider when selection an option for providing outstanding benefits if a scheme is discontinued

Answer 14

• does the method give members a CHOICE?
• who takes on the future RISKS of experience not being as expected?
• do INVESTMENTS need to be realised?
• what SECURITY does the method offer?
• what EXPENSES be incurred?
• will any scheme SURPLUS or deficit be crystallised?