Ch38: Surplus and surplus management

Question 1

Reasons for performing an analysis of surplus (12)

Answer 1

• Provide management information
• Provide data fro use in executive remuneration scheme
• Provide information on trends in the experience of the provider to feed back into the actuarial control cycle
• Provide a check on the valuation data and process, if carried out independently
• Provide reconciliation of values for successive years
• Provide detailed information for publication in the provider’s accounts
• Show the financial effect of divergences between the valuation assumptions and actual experience
• Show the variance in the financial effect of individual sources is a complete description of the variance in the total financial effect
• Show the financial effect of writing new business
• Validate the calculations and assumptions used
• Determine the assumptions that are the most financially significant
• Identify non-recurring components of surplus, thus enabling appropriate decisions to be made about the distribution of surplus

Question 2

Levers on surplus (6)

Levers are the factors a provider can control & manage that influence S

Answer 2

• Reduce the likelihood of claims through:
  * Good underwriting of new business
  * Good underwriting at claims stage
  * Providing customer incentives not to claim
• Reduce cost of claims through
  * Cost-effective claims management procedures
  * Reinsurance to limit volatility and protect against large claims
  * Reducing future benefit payments
  * Keeping guaranteed benefits to a minimum
  * Introducing/Increasing excesses
• Control expenses:
  * Periodically reviewing expenses
  * Keeping charges/premiums flexible
  * Ensuring that claims expenes are in proportion with claim size
• Reduce number of contracts that lapse or do not renew at renewal date
• Follow an investment policy that increases investment returns
• Adopt an effective tax management policy

Question 3

Key factors that will affect the ampunt of surplus distributed in a life insurance company are: (6)

Answer 3

• Provision of capital
• Margins for future adverse experience
• Business objectives of the company
• Policyholder expectations
• Shareholder expectations
• Other stakeholder (including staff) expectations

Question 4

Factors influencing decision about application of surplus or deficit in benefit schemes are

Answer 4

• Legislation
• Tax treatment
• Scheme rules
• Discretion of sponsor/managers
  * Risk exposures
  * Source of surplus
  * Industrial relations
  * Speed of corrective action