38 - Surplus and Surplus Management Flashcards
Give the considerations needed when using revenue to calculate surplus.
- Allowance for the need to establish provisions
2. Allowance for the change on asset values
Define: Profits
Revenue - Expenditure
Define: Surplus
Assets - Liabilities (May need to comply with regulatory restrictions on which types of assets or liabilities count in this calculation.)
Define: Surplus arising
The change in surplus over a certain time period (can be equated to profit).
Give the reasons for performing an analysis of surplus
DIVERGENCE Trends
Divergence of actual vs expected, the financial effects and significance
Information for management and accounts
Variance checks - the whole equal to the sum from levers
Experience monitoring for feedback into ACC
Reconcile values for successive years
Group into once-off or recurring sources of surplus
Executive remuneration schemes
New business strain effects
Check valuation assumptions and calculations
Extra check on valuation data and process
Trends
What are the three different models used to perform an analysis of surplus?
- Expected experience with expected sales volumes
- Expected experience with actual sales volumes
- Actual experience with actual sales volumes
What is the main conclusion of an analysis of surplus looking to answer?
Whether the surplus arising is from experience differing from expected or from sales volumes being different to expected.
How can we make sure that our analysis of expenses is appropriate and useful?
By unit costs so as to remove the influences of different volumes of business sold and in force over two periods being compared.
How is distributable surplus allocated in a life insurance company?
- Allocated to with-profit policyholders
- Allocated to shareholders
- Retained as working capital
How is distributable surplus allocated in a life insurance company?
- Allocated to with-profit policyholders
- Allocated to shareholders
- Retained as working capital
Why is surplus usually retained in a benefit scheme?
It may not be possible to return surplus to the sponsor due to regulations on tax or simply prohibiting it.
To keep for periods where the sponsor may struggle to make benefit payments in a timely manner.
Hard to come to a fair decision on how to distribute surplus that maintains the sponsor’s reputation and satisfies all stakeholders.
Give the sources of surplus.
- Claims - mortality, morbidity, claim frequency, claim amounts.
- Volume - new business levels, withdrawals, lapses
- Other cash flows - investment income and gains, expenses, commission, premiums/contributions paid
- Other factors - salary growth, inflation, taxes.
- Strategic events
- Change to valuation methods or assumptions - depends on the level of asset-liability matching.
Give the levers on surplus that are used to control the amount of surplus.
- Reduce the likelihood of claims - underwriting
- Reduce the cost of claims - management procedures or reinsurance
- Control expenses - restrictions and criteria
- Increase renewals or reduce lapses
- Increase investment returns with acceptable level of risk
- Adopt effective tax management policy
Give an additional factor to decide upon after a decision is taken as to how to apply the surplus/deficit in a benefit scheme.
The pace at which the surplus will be allocated or a deficit will be made good.
Outline the main issue with financial services that require additional methods to determine whether a contract is profitable before it runs off the books.
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.
Give the factors that influence the amount of surplus distributed in a life insurer.
- Provision of capital
- Margins for future adverse experience
- Business objectives of the company
- Policyholder, shareholder and other stakeholder expectations
Give the factors influencing the decision about the application of surplus or deficits in a benefit scheme.
- Legislation
- Scheme rules
- Tax treatment
- Discretion of the sponsor/managers
Give the factors that influence the sponsor or managers of a benefit scheme when deciding how to apply a surplus or defecit.
- Risk exposure of the various parties
- Source of the surplus/deficit
- Expected effect of that decision on industrial relations
Give the sources of surplus for a pension scheme
- Investment returns
- General salary increases
- Promotional salary increases
- Inflation used for pension increases
- Discretionary pension increases
- Ill-health retirement rates
- Pre-retirement mortality
- Post-retirement mortality
- Mortality rates of dependents
- Withdrawal rates
- Early/late retirements
- Amounts commuted
- Expense inflation
- Marital status
- Differences in contributions paid vs those expected
- A change in valuation method
- Benefit changes
- Changes in legislation
- Differences in the number of new entrants to expectations
- Failure of any 3rd parties
- Restructuring of the scheme
- Surplus carried forward from a previous valuation
List the parties to consider when distributing any surplus or deficit within a life insurance company
- Shareholders - strategic aims and dividend policy
- With-profit policyholders
- Without-profit policyholders
- Potential policyholders and brokers
- Board of directors
- Competitors
- Regulators
- Reinsurers
- Creditors of the company
- Marketing
- Administrators and IT department.
Give the factors that need to be considered when meeting policyholders’ expectations
- Any illustrations or promises made in the marketing literature of the product
- Discretionary benefits awarded recently
- Discretionary benefits awarded on similar contracts
- Current industry practice
