CHP 38: Surplus & Surplus Management

Question 1

List the reasons why providers analyze surplus

Answer 1

DIVERGENCE

• Divergence of actual vs expected (show financial effect / significance of)
• Information to management and for accounts
• Variance as a whole is equal to the sum of the variances from the individual levers.
• Experience monitoring to feedback into ACC
• Reconcile values for successive years
• Group into one-off / recurring sources of capital
• Executive remuneration schemes (data for)
• New business strain (show effects of)
• Check on valuation assumptions and calculations
• Extra check on valuation data and process

Question 2

Give examples of claim / benefit amounts can be controlled

Answer 2

1. Monitor claims experience
2. Reinsurance
3. Good claims management systems
4. Provide rehabilitation services (income protection insurance)
5. Reduce future benefit payments, e.g. by increasing the age of eligibility or by removing an inflation link.
6. Tight policy wording
7. Keep guarantees and options to a minimum
8. Policy excesses

Question 3

Give examples of how claim frequency can be controlled

Answer 3

1. Monitor claims experience
2. Good underwriting of new business
3. Good claims management systems
4. Eligibility criteria
5. Tight policy wording
6. Customer incentives not to claim (e.g. no claims discount)
7. Policy excesses

Question 4

Give examples of how expense surplus can be controlled

Answer 4

1. Expense budgeting and monitoring
2. Variable charges / premiums
3. Ensure that underwriting and claims expenses are commensurate with the size of the claim
4. Policy excesses so that small claims (and the associated expenses) are avoided.

Question 5

Give examples of how a provider can increase the number of contracts that renew or reduce the number that withdraw.

Answer 5

1. Monitor renewal / withdrawal experience
2. Issue renewal notices
3. Have automatic renewals
4. Maintain competitive premiums
5. Offer loyalty discounts
6. Provide good customer service and claims handling
7. Undertake marketing activities to promote the brand.
8. Impose surrender penalties / offer no benefit on surrender
9. Claw back commission from brokers on policies that are written.

Question 6

Give examples of how the provider can reduce the likelihood of an investment return deficit.

Answer 6

1. Matching (nature, term, currency)
2. Subject to this, select investments to maximize overall return
3. Diversification by asset class and by stocks within a class.
4. Track an index or competitors’ fund allocations
5. Select low variance investments
6. Tax-efficient investments
7. Controls on investment expenses
8. Monitor investment experience