38. Surplus and surplus arising TODO

Question 1

What is surplus?

Answer 1

• V(A)-V(L)= Surplus

Question 2

What is surplus arising?

Answer 2

• ΔV(A) − ΔV(L) = Surplus arising
• Over a period of time
• Equivalent to profit
• Often referred to as ‘surplus’

Question 3

Why do providers analyse surplus?

Answer 3

• DIVERGENCE
• Divergence of actual vs expected
• Information to management and for accounts
• Variance as a whole= sum of variance individual levers
• Experience monitoring=> Feedback into ACC
• Reconcile values for successive years
• Group into one-off/recurring sources of surplus
• Executive renumeration scheme (Data for)
• New business strain (show effects of)
• Check on valuation assumptions and calcs
• Extra check on valuation data and process

Question 4

What does an analysis of surplus involve?

Answer 4

• Comparing what actually happened
• To what was expected to happen

Question 5

How would E[experience] be projected forward?

Answer 5

• I- Use a model capable of projecting:
• IS
• BS
• Expected basis
• II- Such a model usually exists
• Original pricing model
• Profit testing model
• III-Model must be consistent o Assumptions+ diff elements of output=> mut consistent
• IV-Projected model output for each model point=> scaled up E[#Fut C] for each year
• V-For each future year # C still in force from previous years + in
• VI-Enables E[IS] and E[BS] to be built up

Question 6

How would sales volume not being as expected be isolated in an analysis of surplus exercise?

Answer 6

• Model previously described
• Run 2nd time
• With the actual sale volumes rather than expected volumes
• Compare the two=> Sales volume surplus
• How would sales volume not being as expected be isolated in an analysis of surplus exercise
• Run the model described in 5 again
• Using actual death # and benefits paid
• Compare this and sales run model=> Mortality surplus

Question 7

Why is it important for an insurance company to conduct a periodic analysis of surplus?

Answer 7

• Important part of monitoring experience=> ACC
• Provide feedback=> contract design
• Life insurance companies=> long term
• General Insurance=> Long tailed
• Wait until risks have gone off the books=> TOO LONG

Question 8

What are the main sources of surplus to a life insurance company?

Answer 8

• Demographic factors
• Mortality/morbidity
• Withdrawals
• New business volumes/ new business mix
• Economic factors
• Premiums received
• Expenses
• Inflation
• Investment income+ gains
• Tax
• Change in the valuation basis
• Surplus or deficit= counterparty failure+ business restructuring
• What are levers on surplus
• Factors=> used by management > control amount of surplus arising

Question 9

How can claim frequency be controlled?

Answer 9

• Monitor claims experience
• Good underwriting of new business
• Good claims management system
• Eligibility criteria
• Tight policy wording
• Customer incentives not to claim
• Policy excesses

Question 10

How can claim benefit amounts be controlled?

Answer 10

• Monitor claims experience
• Reinsurance
• Good claims management system
• Provide rehabilitation services
• Reduce future benefit payments
• Tight policy wording
• Keep guarantees and options to a minimum
• Policy excesses

Question 11

How can expense surplus be controlled?

Answer 11

• Expense budgeting and monitoring
• Variable charges/premiums
• Ensure underwriting and claims expenses are commensurate with the size of claim
• Policy excesses so that small claims are avoided

Question 12

How can a provider increase the number of contracts that renew and reduce withdrawal rates?

Answer 12

• Monitor renewal/ withdrawal expense
• Issue renewal notice
• Have automatic renewals
• Maintain competitive premiums
• Offer loyalty discounts
• Provide good customer service and claims handling
• Undertake marketing activities to promote brand
• Offer surrender penalties/ or no benefit on surrender
• Claw back commission from brokers on policies that have withdrawn

Question 13

How can a provider reduce the likelihood of investment return deficit?

Answer 13

• Matching
• Term
• Nature
• currency
• After matching=> select assets max returns
• Diversify by asset class and individual assets in the class
• Track and index or competitors fund allocation
• Low variance investments
• Tax-efficient investments
• Controls on investment expenses
• Monitor investment experience

Question 14

How can a provider adopt a good tax management policy?

Answer 14

• Utilise tax allowances fully
• Use tax-efficient investments
• Pay tax on time to avoid penalties

Question 15

What issues affect the amount of surplus a life insurance company should distribute?

Answer 15

• Constitution of the company
• Mutual=> 100% policyholders
• Proprietary=> shareholders + policyholders (If with profit)
• Provision of Cap=> deferring distribution of surplus=> source of Cap o Depends on the form of distribution
• Margins for adverse experience o Pace at which profits arise at which they distributed o Overdistribution drains free assets
• o Under-distribution will not meet policy holder expectations
• Business objectives o Maximise distribution to improve competitive position o Cushion against risk=> maintain surplus
• Stakeholder expectations o Loss of business o Supervisory intervention
• List the uses of surplus in a benefit scheme
• Enhance benefits
• Reduce contributions
• Return to the sponsor
• Retain as a cushion against adverse experience
• NB once enhanced benefits cannot be reduced or removed

Question 16

What considerations should be taken into account when deciding how, when and to whom a DB pension will distribute positive surplus?

Answer 16

• Legislation=> which categories of members should have priority for distribution of surplus
• Tax=> surplus funds may be excluded from beneficial tax treatment
• Scheme rules=> restrictions on the distribution of surplus avoid potential disputes
• Discretion of the sponsor or scheme manager
• Risk=> if taken on by sponsor=> receive surplus