17 Analysis of Surplus

Question 1

What are the main components of an analysis of surplus (the “sources of surplus”) (9)?

Answer 1

1. Opening Adjustments.
2. Return on Opening Surplus.
3. Economic Variances.
4. Changes in Economic Assumptions.
5. Insurance Variances.
6. Changes in Insurance Assumptions.
7. New Business.
8. Other Variances (e.g. changes in tax, capital injection)
9. Unexplained.

Question 2

List possible opening adjustments for an analysis of surplus. (4)

Answer 2

1. Changes or corrections to the model.
2. Changes or corrections to the data.
3. Changes to model point grouping.
4. Methodology changes.

Question 3

List the components of the investment return variance in Solvency 2 analysis of surplus. (6)

Answer 3

1. Yields on actual backing assets vs risk free rate (based on swap rates).
2. Actual spread movements (and defaults) vs the allowances in the matching and volatility adjustments.
3. Mismatching surplus.
4. Changes in asset mix.
5. Actual returns vs internal view on expected returns.
6. Internal view on expected returns vs expected return underlying the BEL.

Question 4

Describe a possible process to perform an analysis of surplus. (8)

Answer 4

1. Re-run the start year valuation model.
2. Update the balance sheet for any opening adjustments to get the effect of these adjustments.
3. Run the model with updated insurance assumptions to get the effect of changes in insurance assumptions.
4. Roll the model forward (without NB) to the valuation date with actual investment returns and economic scenarios calibrated at the valuation date, to get the economic variance.
5. Add new business written during the year and run the model at the valuation date to get the effect of NB.
6. Adjust the model for actual experience differing from that expected over the year to get the insurance experience variances.
7. Adjust the rolled forward balance sheet for items such as capital injections or tax changes.
8. Compare this balance sheet with the actual valuation date balance sheet to give the unexplained.

Question 5

List the additional factors in an analysis of surplus that arise when the Solvency 2 RISK MARGIN component s included. (3)

Answer 5

1. Changes in the size of the SCR components used.
2. Assumptions relating the projected run-off of the SCR subset.
3. Changes to allowances for diversifications within the risk margin calculations.

Question 6

List the additional factors in an analysis of surplus that arise when the Solvency 2 SCR component s included. (4)

Answer 6

1. Changes in correlations between risk factors.
2. Changes in approach (e.g. if moving from Standard Formula to Internal Model).
3. Changes to the 1 in 200 years calibrations.
4. Identification and inclusion of different risk factors.

Question 7

List ways in which the results of an analysis of surplus may be used in business decisions. (5)

Answer 7

1. Decisions related to the sale new business (e.g. product design, volume limits).
2. Changing best estimate assumptions.
3. Repricing contracts or altering charges on existing business.
4. De-risking the balance sheet.
5. Highlighting new risks.