Spring 2018 (makeup) Q1 a)
Why is the endorsement on policy B not prorated for the in-force premium while it is for the written premium? Wouldn't written be $30, so how could in-force be $60?
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Why is the endorsement on policy B not prorated for the in-force premium while it is for the written premium? Wouldn't written be $30, so how could in-force be $60?
Comments
The "in-force" quantities are never pro-rated. The in-force premium is a measure of the risk exposure at a specific point in time so it doesn't matter whether the policy is in-force for 1 day or 1 year. If the written premium is $60 and the policy is in force, then the in-force premium is $60.
Note that this is a common mistake (to incorrectly pro-rate in-force quantities) so it's good you asked about this.
I'm a bit confused about how $60 was written on the endorsement, though. $60 is the full-term premium, but it was endorsed halfway through the policy, so I would think that the written premium from the endorsement was just $30, and so in-force would never be higher than $30 from the endorsement. Could the endorsement mean that the policy is extended for another year?
You may be overthinking this...
It sounds like there’s a bit of a mix-up here regarding the terms “written premium” and how endorsements are reflected in premiums. The written premium for a full term reflects the total amount that would be charged for the policy if the current conditions applied for the entire policy period. When an endorsement occurs partway through a policy term, it usually modifies the terms of the policy and the premium is adjusted accordingly.
If an endorsement is issued halfway through the policy term and it's intended to adjust the premium for the remaining term only, then yes, you'd typically see a prorated additional premium reflecting the change for the remainder of the policy period. In this case, if the full-term additional premium is $60 and the endorsement takes place halfway through, a prorated written premium of $30 would be expected for the half-year.
However, the in-force premium as of a specific date doesn't get prorated; it reflects all the premiums for the policies that are active on that date. So even if the written premium was adjusted mid-term to $30 due to proration, the in-force premium as of a date after the endorsement would still be the full $60, because that's the total additional amount the policyholder is responsible for as of the endorsement date moving forward.
To summarize: For the purposes of calculating in-force premium as of a particular date, we consider the full amount of the endorsement that is in effect as of that date, without proration, regardless of when within the policy term the endorsement occurred. The written premium could indeed be prorated if it only affects part of the policy term, but that's a separate consideration from the in-force premium calculation.
I apologize, especially since this probably is not really worth the time for either of us, but I really don't understand how the policyholder would be responsible for $60 as of the endorsement date moving forward. Where am I wrong in these steps?
If your interpretation is correct then the examiners' report is in error. I guess I don't know for sure, but I would have answered that question the same way as in the examiners' report.
The policyholder isn't actually responsible for the full $60. They would pay a pro-rated amount but what the policyholder pays and what the in-force written premium is aren't the same thing (at least according to my understanding of how calculating in-force quantities works.)
Ok, thank you. Although it's a bit odd to me, I'll take it as it is.
You're welcome. Hopefully it won't come up on your exam. :-)