CH:38 Surplus and surplus management

Question 1

What is surplus arising

Answer 1

The surplus arising over any time period is the change in the surplus over the time period - equivalent to profit

Question 2

What are the reasons for performing an analysis of surplus

10

Answer 2

• show the financial effect of divergences between the valuation assumptions and the actual experience
• determine the assumptions that are the most financially significant - show the financial effect of writing new business
• validate the calculations and assumptions
• provide a check on the valuation data and process, if carried out independently
• identify non-recurring components of surplus, to help make decisions about distributing surplus
• reconcile the values for successive years
• provide management information
• provide data for use in executive remuneration schemes
• provide information for the provider’s accounts
• demonstrate that the variance of the parts is a complete description of the variance of the whole
• give information on trends in the experience of the provider to feed back into the actuarial control cycle.

Question 3

What are the sources of surplus

Answer 3

Actuals vs expected experience in terms of:

• claims - mortality, morbidity, claim freq, claim amounts
• volume - new business, withdrawal, lapses
• other cashflows - investment income, premiums, expenses, commission
• other factors - salary growth, inflation, taxation

Question 4

Define what levers of surplus is

Answer 4

The levers that control the amount of surplus are the factors that the provider can affect using management controls to increase value

Question 5

How can providers control and manage costs of the payments and expenses to improve surplus (levers of surplus)

Answer 5

• reduce likelihood of claims
• reduce cost of claims
• control expenses
• increase renewals/ reduce lapse
• increase investment return
• adopt an effective tax management policy

Question 6

What are the factors that affect the amount of surplus distributed?

Answer 6

• provision of capital
• margins for future adverse experience
• business objectives
• policyholder, shareholder and other stakeholders expectation

Question 7

What are the factors that affect the amount of surplus distributed for a benefit scheme?

Answer 7

• legislation
• scheme rules
• tax treatment
• discretion of the sponsor