CH37 - Surplus & surplus management

Question 1

Profit

Answer 1

Profit is the difference between revenue and expenditure. Because of the long-term nature of financial services contracts, the final profit from a scheme of tranche of policies cannot be determined until all risks have gone off the books.

Question 2

Surplus

Answer 2

Surplus is the difference between the value of assets and the value of the liabilities. Surpluses (or deficits) may appear and disappear as the contract’s experience unfolds.

The surplus arising over any time period is the change in the surplus over the time period. Surplus arising is equivalent to profit.

Question 3

Reasons for performing an analysis of surplus / profit (12)

Answer 3

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

A provider will want to analyse the surplus arising in order to:

1. show the financial effect of divergences between the valuation assumptions and the actual experience
2. determine the assumptions that are the most financially significant
3. show the financial effect of writing new business
4. validate the calculations and assumptions
5. provide a check on the valuation data and process, if carried out independently
6. identify non-recurring components of surplus, to help make decisions about distributing surplus
7. reconcile the values for successive years
8. provide management information
9. provide data for use in executive remuneration schemes
10. provide information for the provider’s accounts
11. demonstrate that the variance of the parts is a complete description of the variance of the whole
12. give information on trends in the experience of the provider to feed back into the actuarial control cycle.