Chapter 38: Surplus management Flashcards
What is the difference between surplus and profit?
Profit = Revenue - Expenses. Profit can only be determined once a product has gone off book. (negative loss)
Surplus = Value of the assets - Value of liabilities and can be accessed throughout a product’s lifetime. (negative deficit)
What is surplus arising?
(At - Lt) - (At-1 - Lt-1)
Change of surplus over a given time period
Why does a provider want to analyse surplus?
DIVERGENCE
D - Divergence of actual experience from that that was expected. This will identify the assumptions that are most financially significant
I - Information to management, accounts and data for remuneration schemes
V - Variance in the total financial position is explained by the sum of variance in the components of the entity
E - Experience monitoring feedback in the actuarial control cycle
R - Reconcile values for successive years
G - Group into one-off and recurring sources of surplus
E - Executive remuneration schemes (data, therefore)
N - New business (show financial effect)
C - Check on valuation assumptions and calculations used
E - Extra check on the valuation of data and processes
How to carry out an analysis of surplus
- Compare actual vs expected experience
- Expected results are modelled from the product development stage with mutually consistent assumptions
- Apply expected new business and renewals levels -> aggregate
- Compare modelled profit accounts with actual profit account
- Analyse any deviations
What items does an income statement comprise?
and state what will influence each item
+ Premium income
- New business volume and mix
- Withdrawal and lapses
- Claims outgo
- Claim frequency (mortality, morbidity, economic and political conditions (for GI), weather, crime)
- Claim amount
- Claim inflation
- Mix of business
- Expenses
- Current expense amounts
- Inflation
- Commission
+ Investment income
- Tax
What additional reason can influence surplus to different (except that of the profit and loss brainstorming)
- Differences in valuation method / assumptions
What can managers do to control surplus (levers of surplus)
- New business volume:
- Marketing
- Customer surveys
- Competitive premiums
- Business mix:
- Target markets through specific distribution channels and monitor this approach on an ongoing basis
- Withdrawal and lapses:
- Ensuring products meet customer needs
- Clawback arrangements to ensure brokers don’t encourage lapses
- Loyalty bonuses
- Good customer service
- Automatic renewals
- Competitive premiums
- NCD
- Gifts on renewal
- Claim frequency
- Stricter underwriting
- Claims control system (point and ongoing basis, e.g., ensure continued eligibility)
- Incentives not to claim, NCD and excesses
- Claim amount
- Reinsurance
- Keep guaranteed benefits to minimum
- Excesses and maximum benefit levels
- Limit benefit increases
- Expenses
- Current expense amounts and inflation
- Underwriting and claims: only on the biggest risks
- Administration: Automating processes
- Investment expenses: Passive strategy and avoiding unnecessary switching
- Flexible premiums and charges to cover expenses
- Commission
- Renegotiating rates
- Changes method of distribution
- Investment income
- Matching liabilities
- Mismatching to increase return
- Incentivise fund managers for good performance
- Tax-efficient investment strategy
- Tax
- Utilising tax allowances
- Pay tax on time, to avoid penalties
- Use tax-efficient vehicles
Who do companies distribute the surplus to?
- Shareholders
- Retained as working capital
To who do insurers distribute the surplus?
- Shareholders
- Retained as working capital
- With-profit policyholders
Who do benefit schemes distribute the surplus to?
- No one
- Retain as a cushion against poor experience
- Enhance benefits
- Reduce employer or member contributions
- Return to sponsor
What issues to consider when distributing profit for insurers
- Provisions of capital
- Margins for adverse experience
- Business objectives
- Policyholder and shareholder expectations
What issues to consider when distributing profit for a benefit scheme
- Legislations
- Scheme rules
- Tax treatment
- Sponsor
- Source of surplus (pension increases higher than expected, investments returns higher than expected, contributions cautious)
