Surplus, Analysis of Surplus, & Distribution of Surplus Flashcards
Define profit and when it can be determined
Profit = Revenue – Expenditure
Profit cannot be determined until all risks have gone off the books.
Important to analyse expected vs actual
Define Surplus at time t and when does a surplus arise
Value of Assets at time t (At) – Value of Liabilities at time t (Lt)
When any item of actual experience is different from that assumed
Define change in surplus
Change in Surplus = (At+1 - Lt+1) - (At - Lt)
What are reasons for performing an analysis of surplus
To show the financial effect of divergences between the valuation assumptions and the actual experience
Show financial effect of writing new business/new entrants.
Check on the valuation data and process
To identify non-recurring components of surplus - feeds into decision should i distribute
Provide management information
and information for publication
Show variance (Forecast-Actual) of individual levers is complete description of total financial effect
To feed back into the actuarial control cycle trends in the experience of the provider
What does an analysis of surplus do?
Compares actual experience vs expected experience (which is projected using a model)
At the product level will be profit test models which will be combined to give a complete model of the company’s revenue accounts.
Assumptions used in the models should be mutually consistent
Model allows for new and inforce business.
First changes analysed are usually business volumes.
How is analysis of surplus carried out?
You model new business separately and then take new business out.
Have decrements/terminations been as expected?
Do scenario analysis
What quanitities do we compare Actual vs expected assumptions on?
Mortality, morbidity, withdrawal/lapses, investment income and gains, expenses, commission, salary growth, inflation, taxation, premiums/contributions paid, new business levels, claims etc
Why do we not regularly reprice products?
Involves a lot of costs - you have a lot of literature on what the price is, and approvals and procedures for pricing.
What are some Factors management can use to control surplus/profit
Can reduce likelihood of claims by: underwriting, periodically reviewing claims, providing incentives not to claim
Can reduce benefit amounts by: Reinsurance, increasing excesses.
Can control expenses: Reviewing, flexible charges/premiums
Can effectively manage tax
Can follow investment strategy
- maximise return
Can reduce lapses or increase the number of policies renewing.
For insurance companies who would get the surplus if surplus is distributed?
For insurance companies: distributable surplus will be split between shareholders (via dividends) and with profit policyholders (via bonuses)
A mutual insurance company has no shareholders and thus all of the distributable surplus belongs to policyholders.
For benefit schemes usually what happens to surplus? What are the options
For benefit schemes surplus is usually retained within the scheme . May enhance the benefits of members or reduce future contributions
There’s difficulty in removing benefit enhancements once awarded so need to be sure if bonuses are stable or not.
Changes in the contribution rate are normally the first choice.- Sponsor would prefer reduced contributions
With a with profit shareholder what bonus do they get? What is the expectation
Will be a bonus every year. Sometimes customers like the idea of getting this bonus but they don’t want it to go up and down dramatically each year.
What are the issues around distribution of surplus - what are things to consider should i distribute or not
Amount to distribute, when to distribute and the volatility of the surplus.
If you uplift everyone’s pension you cannot take this away.
Surplus comes in bits - need a long term view as want fairness across generations.
Will try to make dividends smooth - - signals company is in control means distribution to shareholders is even sustainable.
Knowing your capital requirements is key - ORSA assessment for now and forthcoming years so that we don’t distribute money you might need.
What capital might be needed in the Capital in General insurance
General insurance; capital is related to the volume of premiums. So if you plan on increasing your premiums income you need to recognise you will also have a bigger capital requirement.
Must incorporate ALL possible future capital needs
What capital might be needed in the Capital in Life insurance
In life assurance, you release capital when business matures.
If guarantees come into the money, insurers will be liable require capital.
Must incorporate ALL possible future capital needs
If investment is well matched to liabilities, won’t have much exposure to inflation but if investing riskier, need to have capital requirements.
