38 - Surplus and Surplus Management

Question 1

What is an Analysis of Surplus (AOS)?

Answer 1

An analysis of surplus (or profit) is a breakdown of the surplus (or profit) arising over a year into its constituent parts

Question 2

What are the 2 equivalent ways of looking at surplus arising

Answer 2

1. Look at balance sheet entries (ie assets and liabilities)
   OR
2. Look at profit and loss entries (ie revenue and expenditure).

These two viewpoints are equivalent because their component parts are the same, eg investment return, claim payments, expenses

Question 3

Define: Surplus

Answer 3

Assets - Liabilities (May need to comply with regulatory restrictions on which types of assets or liabilities count in this calculation.)

Question 4

Define: Surplus arising

Answer 4

The change in surplus over a certain time period (can be equated to profit).

Question 5

Give the reasons for performing an analysis of surplus

Answer 5

Assisting the management in decision making:

1. Financial effect of divergences between assumptions and actual experience
2. Identify financially significant assumptions
3. Show the effects of writing new business
4. Distribution of surplus - recurring or not
5. Management information
6. Provide info on trends

Providing information for other purposes:

7. Data for use in executive remuneration schemes
8. Account information

Data and calculation checks:

9. Validation of calculations and assumptions
10. Reconciliation of successive values
11. Provide independent checks on valuation data and processes
12. Show that the variance of the parts is a complete description of the variance of the whole

Question 6

What are the three different models used to perform an analysis of surplus?

Answer 6

1. Expected experience with expected sales volumes
2. Expected experience with actual sales volumes
3. Actual experience with actual sales volumes

Question 7

What is the main conclusion of an analysis of surplus looking to answer?

Answer 7

Whether:
1. The surplus arising is from experience differing from expected
or
2. From sales volumes being different to expected.

Question 8

How can we make sure that our analysis of expenses is appropriate and useful?

Answer 8

By unit costs so as to remove the influences of different volumes of business sold and in force over two periods being compared.

Question 9

How can Distributable Surplus be allocated for an Insurance company?

Answer 9

1. Allocated to with-profit policyholders
2. Allocated to shareholders
3. Retained as working capital

Question 10

How can Distributable Surplus be allocated for Other corporate institutions?

Answer 10

1. Allocated to shareholders

2. Retained as working capital

Question 11

Why is Surplus usually retained in a benefit scheme?

Answer 11

1. To enhance benefits of members
2. To reduce future contributions of members and/or sponsor
3. It may not be possible to return surplus to the sponsor due to regulations on tax or simply prohibiting it.

Question 12

List sources of surplus

Answer 12

Decrements

1. New business levels
2. Withdrawals/Lapses
3. Mortality/Morbidity

Cashflows

4. Premiums/Contributions
5. Investment income and gains
6. Claim amounts (freq and severity for GI)
7. Expenses
8. Commission

Other factors
9 Salary growth
10. Taxation
11. Inflation

Question 13

List the levers on surplus that are used to control the amount of surplus.

Answer 13

1. Reduce the likelihood of claims - underwriting
2. Reduce the cost of claims - management procedures or reinsurance
3. Control expenses - restrictions and criteria
4. Increase renewals or reduce lapses
5. Increase investment returns with acceptable level of risk
6. Adopt effective tax management policy

Question 14

Give an additional factor to decide upon after a decision is taken as to how to apply the surplus/deficit in a benefit scheme.

Answer 14

The pace at which the surplus will be allocated or a deficit will be made good.

Question 15

Outline the main issue with financial services that require additional methods to determine whether a contract is profitable before it runs off the books.

Answer 15

The long-term nature of financial services contracts means that many contracts will be sold between a specific contract being written and running off the books, thus profitability needs to be determined as early as possible.

Question 16

For a Life insurance company, what factors influence the amount of surplus distributed

Answer 16

1. Provision of capital
2. Margins for future adverse experience
3. Business objectives of the company
4. Policyholder, shareholder and other stakeholder expectations

Question 17

For Benefit schemes, what factors influence the decisions about the application of surplus or deficit?

Answer 17

1. Legislation
2. Scheme rules
3. Tax treatment
4. Discretion of the sponsor/managers

Question 18

Give the factors that influence the sponsor or managers of a benefit scheme when deciding how to apply a surplus or deficit.

Answer 18

1. Risk exposure of the various parties
2. Source of the surplus/deficit
3. Expected effect of that decision on industrial relations
4. Speed of corrective action

Question 19

Give the sources of surplus for a pension scheme

Answer 19

1. Investment returns
2. General salary increases
3. Promotional salary increases
4. Inflation used for pension increases
5. Discretionary pension increases
6. Ill-health retirement rates
7. Pre-retirement mortality
8. Post-retirement mortality
9. Mortality rates of dependents
10. Withdrawal rates
11. Early/late retirements
12. Amounts commuted
13. Expense inflation
14. Marital status
15. Differences in contributions paid vs those expected
16. A change in valuation method
17. Benefit changes
18. Changes in legislation
19. Differences in the number of new entrants to expectations
20. Failure of any 3rd parties
21. Restructuring of the scheme
22. Surplus carried forward from a previous valuation

Question 20

List the parties to consider when distributing any surplus or deficit within a life insurance company

Answer 20

1. Shareholders - strategic aims and dividend policy
2. With-profit policyholders
3. Without-profit policyholders
4. Potential policyholders and brokers
5. Board of directors
6. Competitors
7. Regulators
8. Reinsurers
9. Creditors of the company
10. Marketing
11. Administrators and IT department.

Question 21

Give the factors that need to be considered when meeting policyholders’ expectations

Answer 21

1. Any illustrations or promises made in the marketing literature of the product
2. Discretionary benefits awarded recently
3. Discretionary benefits awarded on similar contracts
4. Current industry practice