Capital and Surplus Management

Question 1

Why Financial Providers Need Capital.

Answer 1

REG CUSHION

Regulatory requirement to demonstrate solvency
Expenses of launching a new product / starting a new operation
Guarantees can be offered

Cashflow timing management
Unexpected events cushion
Smooth profit
Help demonstrate financial strength / attract NB / obtain good credit rating
Investment freedom to mismatch
Opportunities (e.g. M&A)
New business strain financing

Question 2

Reasons for Analysing Surplus

Answer 2

DIVERGENCE

Divergence of A vs E (show financial impact of / significance of)
Information to management and for accounts
Variance of whole = sum of variance of parts
Experience monitoring to feedback into ACC
Reconcile values for successive years
Group into one-off / recurring sources of surplus
Executive remuneration schemes (data for)
New business strain (show effects of)
Check on valuation assumptions and calculations
Extra check on valuation data and process