Chapter 38: Surplus and surplus management

Question 1

Reasons for continuous analysis of surplus:

DIVERGENCED

Answer 1

• Divergence of the actual experience vs the expected results financial effect
• Information given to management and for accounts
• Variance in the total financial effect is described by the variance of the individual levers, Does individual levers add up to total?
• Experience monitoring to feed back into the ACC
• Reconcile valuations for successive years to check consistency of the assumptions
• Group into recurring/once-off sources of surplus enabling appropriate decisions to be made on the distribution of surplus
• Executive remuneration scheme data - golden handcuff schemes: bonus of 10m if you stay 5 years. etc
• New business strain affects
• Check on valuation assumptions and calculations
• Extra check on valuation data and process
• Determine the assumptions that are the most financially significant

Question 2

Levers/sources on surplus/profit

CRIEC CLIM VVACC

Answer 2

Claim likelihood and amount 
Renewal rates
Investment strategy 
Effective management strategies (Tax and accounting and fraud) MURDA 
Control expenses  

Commission
Lapse rates
Inflation (Claim size and expenses)
Mix of business

Volume of business 
Valuation basis and method
Assumptions from formula of product , Demographic and 5CIET
Carried forward surplus/deficit
Change in tax, policies

Question 3

Carrying out surplus analysis

PCEEA

Answer 3

Project income statement and balance sheet of product into future, starting with initial pricing model and ensuring assumptions are consistent and realistic
Compare three models:
Expected experience and expected volume of business
Expected experience and actual volume of business
Actual experience and actual volume of business

Question 4

Factors determining the application of surplus for a benefit scheme:
LIST DiSS CEFE

Answer 4

Legislation
Industrial relations
Scheme rules
Tax benefit

Discretionary decision making
Source of surplus
Speed of corrective action

Competition/ other funds / employers
Expectations of members
Funding level of the fund
Ease of calculation

Question 5

Factors determining the application of surplus for a life insurer:
PP WOES

Answer 5

Provision of capital and margins
Pace of surplus arising and distribution difference
Working capital retained
Objectives of the business
Expectations of the policyholder/ Shareholder
Smoothness of results / smoothness in the distribution

Question 6

Sources of surplus For pension:

MMEISE (bietjie redundant, ons bespreek assumptions in CRIEC CLIM VVACC)

Answer 6

• Mortality
• Morbidity
• Early retirement
• Investment returns
• Salary inflation
• Expense inflation

Question 7

Causes of a change in claims experience:

CLARBEN VRUIF DRINKS

Answer 7

Claims frequency: 
Catastrophe 
Loose policy wording 
Anti-selection and Attitude of claimants 
Random variation 
Business mix changes 
Education of clients on eligibility of claims 
New Risk factors not allowed for
Volumes of Business 
Risk factors missed by underwriting 
Underwriting standards decreased - Claims and proposal stage
Internal claims processing improved 
Fraud  

Claim Size:
Demand for services increased
Regulation increased, increasing cost of benefit
Inflation
New services available - cheaper or expensive
K - ???
State subsidizing Decreased