Chapter 38 - Surplus and surplus management Flashcards
Define the terms ‘surplus’ and ‘surplus arising’
‘Surplus’ is the value of the assets less the value of the liabilities.
‘Surplus arising’ is the change in the value of the assets less the change in the value of the liabilities over a period of time. Surplus arising is equivalent to profit.
Often surplus arising is referred to simply as the surplus.
List the reasons why providers analyse surplus
VV MANDATED RN
- VALIDATE calculations and assumptions
- demonstrate that the VARIANCE in the financial effect of individual sources is a complete description of variance in the total financial effect
- provide MANAGEMENT information
- determine ASSUMPTIONS that are most financially significant
- show the financial effects of writing NEW business
- show the financial effect of DIVERGENCE between valuation assumptions and actual experience
- provide information for publication in ACCOUNTS
- give info on the TRENDS in experience that feed back into the actuarial control cycle
- provide data for use in EXECUTIVE remuneration schemes
- provide checks on valuation DATA and processes
- RECONCILE values for successive years
- identify NON-RECURRING components of surplus: enables appropriate decision making about distribution of surplus
Carrying out an analysis of surplus involves comparing what actually happened over the year against with what was expected to happen.
How would the expected experience be projected foreward?
- Use a model capable of projecting items such as the income statement (revenue account) and balance sheet on the expected experience basis.
- Usually such a model will already exist, for example the original pricing or profit testing model.
- It is important that the model is self-consistent, i.e. assumptions and different elements of the output are mutually consistent.
- The projected model output for each model point is scaled up by the expected number of contracts to be sold in each future year.
- Then, for each future year, the number of contracts still in force from the previous years need to be added in.
- This enables expected future revenue accounts and balance sheets for the business to be built up.
- Then compare these account with actual accounts to derive deviation from expected
- Expenses should ideally be analysed in the form of unit costs rather than total amount
Sources of surplus
I COMPANIES FTW
- Investment income and gains
- Commission
- Option take up rates
- Mortality & Morbidity
- Premiums / Contributions paid
- (claim) Amounts
- New business levels
- Inflation
- Expense
- Salary growth
- claim Frequency
- Tax
- Withdrawal / lapses
Define the term ‘levers on surplus’
Levers on surplus are factors that management can use to control the amount of surplus arising.
The ways in which management can affect the levels of surplus / deficit
ARE LIT
- reduce the claim/benefit AMOUNT by:
GRIEF
– keeping GUARANTEED benefits to a minimum
– using REINSURANCE to limit the volatility of claims or to protect against large claims
– INTRODUCING/increasing excesses
– cost-EFFECTIVE claims management procedures
– reduce FUTURE benefit payments - REDUCE the number of contracts that lapse
- control EXPENSES by:
– periodically reviewing expenses
– keeping charges / premiums flexible
– ensuring that claims expenses are commensurate with claim size - reduce the LIKELIHOOD of claims through:
– better underwriting of new business
– better underwriting at claims stage
– provide incentives to customers not to claim - follow an investment policy that increases INVESTMENT returns
- adopt an effective TAX management policy:
– fully utilising tax allowances
– tax being paid on time
– tax-efficient vehicles being used
What measures can a provider put in place to prevent fraudulent claims
the requirement to see
- a medical certificate
- death certificate
- pictures of damage
- reports by loss assessors
- pictures of stolen goods
- evidence of business continuity incidents
Give examples of how expense surplus can be controlled
- Expense budgeting and monitoring
- Variable charges / premiums
- Ensure that underwriting and claims expenses are commensurate with the size of the claim
- Policy excesses so that small claims (and the associated expenses) are avoided.
When distributing surpluses, life insurance company must consider:
COME
- provision of CAPITAL
- business OBJECTIVES of the company
- MARGINS for future adverse experience
- EXPECTATIONS - policyholder, shareholder, & other stakeholders
Give examples of how the provider can reduce the likelihood of an investment return deficit.
- Matching (nature, term, currency)
- Subject to this, select investments to maximize overall return
- Diversification by asset class and by stocks within a class.
- Track an index or competitors’ fund allocations
- Select low variance investments
- Tax-efficient investments
- Controls on investment expenses
- Monitor investment experience
Give examples of how a provider can increase the number of contracts that renew or reduce the number that withdraw.
- Monitor renewal / withdrawal experience
- Issue renewal notices
- Have automatic renewals
- Maintain competitive premiums
- Offer loyalty discounts
- Provide good customer service and claims handling
- Undertake marketing activities to promote the brand.
- Impose surrender penalties / offer no benefit on surrender
- Claw back commission from brokers on policies that are written.
When distributing surpluses, benefit schemes must consider:
DR R LISTS
- DISCRETION of sponsor / fund managers
- RISK exposure to various parties
- scheme RULES
- LEGISLATION
- INDUSTRIAL relations
- SPEED of corrective actions
- beneficial TAX treatment
- SOURCE of surplus / deficit
How does changing the valuation basis affect surplus arising?
- it will not affect the total amount of surplus arising, since this is dependent on the difference between actual experience and expected experience
- However, it will affect the timing of the emergence of surpluses during the life of the contract
