38. Surplus and Surplus Management

Question 1

Profit vs Surplus vs Surplus arising

Answer 1

Profit = Revenue - Expenditure

Surplus = Assets - Liabilities

Surplus arising = Change in surplus over time period
Equivalent to profit

Question 2

Sources of surplus

[VOOCCS]

Answer 2

Volume: new business, withdrawals/lapses
Other cashflows: investment income, expenses, premiums/contributions, commission
Other factors: taxes, salary growth, inflation
Claims: mortality, morbidity, claim frequency, claim amounts
Changes in valuation method/assumptions
Strategic events e.g. restructuring

Question 3

Analysis of surplus

Answer 3

Breakdown of surplus arising over a year into its constituent parts

Question 4

How to analyse surplus

Answer 4

Premise: Compare actual results vs expected

1. Model expected results using models from development stage
2. Apply expected new business and renewal levels to models and aggregate the results.
3. Use results to develop a set of revenue accounts
4. Compare modelled accounts to actual to find deviation
5. Analyse deviation

Notes:
•Assumptions in models must be mutually consistent
•Relationships between elements of modelled revenue accounts must be mutually consistent
•Expenses must ideally be analysed in form of unit costs and not the total amount

Question 5

Reasons for analysing surplus

AVIC

Answer 5

Assumptions
- Divergences between valuation assumptions and actual experience

Variance
- Show that variance of the parts is a complete description of the variance of the whole

Information

• Provide management information
• data for use in executive remuneration schemes
• information for published accounts
• information on trends in experience to feed back into actuarial control cycle
• Identify non-recurring components of surplus
• Show financial effect of writing new business

Checks

• Validate calculations and assumptions
• Check valuation data and process (if carried out independently)
• Reconcile values for successive years

Question 6

Levers on surplus

Answer 6

• Reduce likelihood of claims e.g. through good underwriting
• Reduce cost of claims e.g. through claims management/reinsurance
• Control expenses
• Increase renewals and/or reduce lapses
• Follow investment policy that increases investment return
• Adopt effective tax management policy

Question 7

Factors affecting distribution of surplus: Insurance companies

Answer 7

• Provision of capital
• Margins for future adverse experience
• Business objectives
• Policyholder, shareholders and other stakeholder expectations

Question 8

Factors affecting application of surplus/deficit: Benefit schemes

Answer 8

• Legislation
• Scheme rules
• Tax treatment
• Discretion of sponsor/managers

Question 9

Factors affecting application of surplus/deficit: Benefit schemes
[Sponsor can decide]

Answer 9

• Risk exposure of parties
• Source of surplus/deficit
• Expected effect of decision on industrial relations

If surplus applied is to advantage of sponsor/ deficit is to be made good by sponsor:
- Further decision relating to pace at which this happens