Chapter 11 - Analysis of Surplus

Question 1

Outline the reasons for the change in surplus over a year? (10)

Answer 1

• Shows the financial effects of divergence of the valuation assumptions from the actual experience
• Furthermore it disclose the impact of new business volumes
• Can be used as checks for valuation data and results
• Assist in surplus distribution by indemnifying non-recurring elements in the surplus emerging
• Trends in elements of surplus may provide the company/management important information
• New items identified in the surplus may be used to inform risk identification process
• Assist in setting future assumptions
• Analyse the impact of policy alterations
• Assist in decision making e.g. de-risk the portfolio
• Required as part of statutory returns

Question 2

Outline the sources of surplus? (9)

Answer 2

• Change in valuation assumptions
• Release of compulsory/discretionary margins (IFRS only)
• Release of risk margin (prudential supervision basis only)
• Expected profit margin on group products (IFRS)

**Actual vs. expected **
-Investment Return
-expenses
-mortality
-morbidity
-other risk benefits (e.g. retrenchment)
-withdrawals
-changes in unit-linked and with profit contracts
-tax

• New business
• Other policy alterations/changes
• Changes in maturity guarantee reserves
• Exercise options and guarantees

Question 3

outline the two approaches for determining the source of surplus? (3)

Answer 3

• An approach that involves the use of formula to build up the valuation liability over the year usually based on without profit products using net premium valuation method
• The second approach is the projection of assets and liabilities over the valuation year which can be applied to different types of business (requires recalculation of assets and liabilities on various bases)
• Even though the formula approach is not often used it can be used as a check for the projection approach

Question 4

If performing the analysis of surplus on a prudential basis what will influence the change in the risk margin? (4)

Answer 4

• Changes in the size of non-hedgeable components of SCR
• Assumptions regarding the run-off of non-hedgeable components of SCR
• Changes in the allowance of diversification within risk margin calculation
• Changes in business decisions that affect the risk margin such as reinsurance

Question 5

outline the calculation of surplus using a projection approach? (6)

Answer 5

• Assets are allocated to contracts equal to the value of liabilities at the beginning of the year
• The assets and liabilities are projected to the end of the year using beginning of the year assumptions as expected experience over the year
• Calculate assets and liabilities at the end of the year using beginning of the year valuation assumptions
• Step (ii) and (iii) are repeated changing one item of the experience to its actual value
• The recalculated surplus at the end of the year less the previous surplus calculated gives contribution of the item to surplus
• Steps (iv) and (v) are repeated for each item in the experience

Question 6

ouline actions that can be taken given the results from an analysis of surplus? (3)

Answer 6

• The results of an analysis of surplus may indicate that the design of a contract can be altered e.g. risk charges for a unit linked contract
• Result may also indicate that a change in basis assumptions are required
• Need to consider this in conjunction with the experience investigation and possibly industry experience