Chapter 11 - Analysis Of Surplus

Question 1

Reasons why a company would analyse the change in surplus: (9)

Answer 1

1. Shows the financial effect of divergences between actual experiences and what is assumed in the valuation basis, as well as the financial effect of writing new business
2. Can provide powerful checks on the valuation data and results, including the checking of items of surplus for reasonability as well as various consistency checks
3. The analysis may assist in the distribution of surplus by identifying items of surplus that are unlikely to recur
4. The trends in the items of surplus may give useful info on trends in the experience of the company
5. New items identified in the analysis may be used to inform the risk identification process
6. To assist in setting future assumptions
7. To analyse the effect of policy alterations
8. To assist in decisions such as derisking the balance sheet in order to protect solvency levels
9. It is required as part of the regulatory returns

Question 2

How does surplus arise?

Answer 2

Surplus arises because of the divergences between the valuation assumptions and actual experience and any profit margin