Chapter 38: Surplus and Surplus Management Flashcards
Profit
Difference between revenues and expenditure.
Surplus
The difference between the value of the assets and the value of the liabilities.
Surplus arising
The surplus arising over any time period is the change in the surplus over the time period. Surplus arising is equivalent to profit.
Analysis of surplus (or profit)
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 (12)
T - give information on TRENDS in the experience of the provider to feed back into the actuarial control cycle.
R - RECONCILE the values for successive years
I - IDENTIFY non-recurring components of surplus
M - provide MANAGEMENT INFORMATION
A - determine the most FINANCIALLY SIGNIFICANT ASSUMPTIONS
D - show the FINANCIAL EFFECT OF DIVERGENCES between the valuation assumptions and the actual experience
V - VALIDATE the calculations and assumptions
V - demonstrate that the variance in the financial effect of the individual levers is a complete description of the variance in the total financial effect
I - provide INFORMATION for the provider’s accounts
C - provide a CHECK on the valuation data and process, if carried out independently
E - provide data for use in EXECUTIVE REMUNERATION SCHEMES
3 Main sources of surplus
- Decrements
- Cashflows
- Other factors
Levers on surplus / profit can be used to (6)
- reduce the likelihood of claims (eg good underwriting)
- reducing claim / benefit amounts (eg using reinsurance to limit claims or protect vs risk of large claims)
- control expenses
- increase renewals and/or reduce lapses
- follow an investment policy that increases investment returns (subject to an acceptable level of risk)
- adopt and effective tax management policy.
For a life insurance company, the factors that will affect the amount of surplus distributed are (4)
- provision of capital
- margins for future adverse experience
- business objectives of the company
- policyholder expectations
The decision of how to apply the surplus / deficit will depend on (3)
- risk exposure of the various parties
- source of the surplus or deficit
- expected effect of that decision on industrial relations
Sources of surplus under:
- Decrements
- new business levels,
- withdrawal / lapses,
- mortality
- morbidity
Sources of surplus under:
- Cashflows
- premiums / contributions paid
- investment income and gains
- claim amounts
- expenses
- commission
Sources of surplus under:
- Other factors
- salary growth
- inflation
- taxation
How would management:
- reduce the likelihood of claims
- periodically reviewing ongoing claims
- good underwriting of new business
- good underwriting at the claim stage
- providing customer incentives not to claim
How would management:
- reduce claim / benefit amounts
- using reinsurance to limit the volatility of claims or to protect from the risk of large claims
- reducing future benefit payments
- keeping guaranteed benefits to a minimum
- introducing / increasing excesses
How would management:
- Control expenses
- periodically reviewing expenses
- keeping charges / premiums flexible
- ensuring that claims expenses are commensurate with the claims size