Study Notes and Published References - Note SN 81-101-00 - LIFE INSURANCE AND ANNUITY NONFORFEITURE PRACTICES
Overview
- w/r nonforfeiture - how to treat terminating PO in relatoin to policy is same cohort who hasn't terminated
- min nonf law is almost all US states
- Canada - no min nonf law
- many forms of health ins (including DI) normally do NOT provide nonf benefits
- what forms to offer on voluntary termination adn which s/b automatic optoin
- nonf values must be determined for a broad range of life and annuity products
- level premium plans -> nonf logic
- "overpays" premium in early years for right to "underpay" in later years
- nonf benefit avail on surrender restores PO equity
- chooing to surrender policy instead of paying prems adn forgo the "right" to "underpay" later yers premiums
- prospective and retrospective values can be quite different on a level prem plan
- questions regarding parity among differnt PO
- satisfied by nonf value that reflects teh past
- or should it consider the future value of the policy
- different methods of determining amounts grow from these answers
Methods of Determing Amounts of Nonf Benefits
- Retrospective Method
- based on fund or account value
- SC may be deducted
- currently used for variable products in US
- fairly easy for PO and sales reps to understand, but limits product design
- "no lapse guarantee" requires taht accum value fo actual prems paid >= amt which specified prems would ahve accumulated to under same set of rates
- or coudl require >= specified prem paid each period
- Prospective Method
- present value of future benefits plus PV of co expenses plus contribution to profit less PV future gross prems
- present values may reflect future rates of mort, morb, int yeilds, premium patterns adn lapse/surrenders
- calc may refledct probabilities at various dates of options avialable
- "natural reserve"
- assumptions may or may not be specified by gov't regulation
- changes in these assumptions after issue change resulting nonf values
- not as easily understood by public
- expected future experience w/in class is likely to be less homogenouus thatn overall experience
- resulting nonf values may not be truely represetnative
- for UL adn other flex prem products, assumptions must be made concerning payment of future premiums
- nonf value avail to terminatoirs reflect FV of ins protection to peristing PO
- parity between terminators and persistors is maintained
- deterioration in co experience can lead to decreases in nonf value that may lead to misunderstandings
- Net Premium Method
- method req'd for Trad Wl adn soem term life in US
- subset of general prospective method
- PV future guar benefits - PV future net prems
- @ issue PV net prems = PV guar benefits + PV "acq expenses"
- acq expenses defined by law/regulation
- based on pattern and PV of DB and other policy specs
- mort talbes prescribed and range of allowed int rates
- for flex prem pols, asumptions must be made concerning paymetn of future prems
- US SNL not set up for non-req'd prems
- depending on circumstances, assume no future prems paid
- actuary may taek a constant % of assume future prems adn adjust in the future if necessary
- alternative calcs may be available for flex prem UL
- payment of prem may affect DB, which needs to be relected in calc
- if policy guarantees w/in range of permissible under US SNL, then CSV is kosher w/ req
- Single Premium Method
- Life ins is paid up policy w/ single prem mostly borrowed from ins co
- like a mortgage where prem payments are mortgage payments
- CV (nonf benefit) = paid up value of policy less "principal" outstanding on "mortgage"
- not used
Nonforfeiture Practices Operative in Selected Countries
- Canada
- no min nonf law
- "group equity" concept used
- value from terminating policies may be used to reduce prems or raise level of benefit for all policyholders
- South Africa
- small policies require reduced paid-up nonf benefits
- co must file plan that states ruls that apply to nonf benefits adn rules must be approved
- Scandinavia
- no min amts req'd
- PO s/b informed about surrender terms adn how calculated if available
- UK
- no mins req'd
- strong disclosure reg
- typical product is variable life and nonf values function of MV of sep accts
- Austrailia
- no mins req'd
- looking into nonf & disclosure rules
- US
- NF Laws adn regs specific and prescriptive
- SOA Unruh Report - 1976
- discussed equity
- PO, Co, agent & regulator and 4 different views of equity
- equity is not an absolute but relative truth
- in the long run, costs of early terminations will be paid by continuing PO
- in short run, if co cannot fully pass on these costs, it will reflect them in reduced profits, PO divs, or agent comp
The Nonf Calculational Plan
- if formula not mandatory, co may wish (or be req'd) to use written nonf calc plan for each block of business
- specify method for determining amts at all policy durations
- specify relevant non-guar elements
- specify methodologies for determing policy experience assumptions to be used to calc nonf benefits
- specify extent to which these amts have been Guaranteed
- use of calculational plan permits flexibility in design adn management of diff blocks of ins policies
- may be based on retrospective or prospective
- calc may assume no future voluntary terminations or it may reflect all available options
- hoped that large portion of US regulatory nonf framework could be replaced by
- regulation of nonf calculational plan
- reliance on professional actuarial statements of opinion
- enhanced regulation of disclosure
Misc Practical Nonf Issues
- if nonf amts calced retrospective - adjustements for mort anti-selection may be inappropriate
- ETI as automatic option can reduce mortality anti-selection (b/c not in force as long)
- can use more liberal reinstatement rules (b/c no reduction in face while under ETI)
- RPU advantage - original form and expiry continued
- very little mort anti-selection s/b expected
- APL - reinstatement not necessary
- however may provide incentive to discontinue payment of prem
- tends to increase co maint expenses
- companies varied in practice re: substd lives
- some increase CV, most don't
Permanent Products w/ Little or no Nonf Values
- T-100 - lapse supported non-par WL w/ no nonf values (or values well below natural reserve)
- positive profit realized when policy surrendered prior to death
- particularly sensitive to LT pricing assumptions for lapses, inv yields and mort rates
-
Copyright © 2004 Steve Welander.
Permission is granted to copy, distribute and/or modify this document
under the terms of the GNU Free Documentation License, Version 1.2
or any later version published by the Free Software Foundation;
with no Invariant Sections, no Front-Cover Texts, and no Back-Cover Texts.
A copy of the license is included in the section entitled
'GNU Free Documentation License'.