Surplus And Surplus Management

Question 1

Reasons for managing profits

Answer 1

Stable dividend stream
Maximize reported profits
Carry excessive profits to next period
Delay taxation

Question 2

How can reported profits be changed?

Answer 2

By strengthening or weakening the reserving basis

Question 3

Reasons for analysis of surplus

Answer 3

Divergence of actual vs expected
Information to management and for accounts
Variance as a whole = sum of variance of components
Experience monitoring = feedback into ACC
Reconcile the values for successive years
Group into one-off/recurring sources for surplus
Executive remuneration scheme
New business strain
Check on valuation assumptions and calculations
Extra check on valuation data and process

Question 4

Sources of surplus

Answer 4

Claims - mortality, morbidity, frequency, amounts
Business volumes - new business levels, withdrawals
Other cash flows - investment income and gains, expenses, commissions and premiums
Other factors - salary growth, inflation rate, interest rates, taxation
Strategic events
Change to valuation method or assumptions

Question 5

factors to consider when deciding how to distribute surpluses

Answer 5

current capital situation

current solvency position

uncertainty around future adverse experience

short term objectives

policyholder expectations

perceptions that policyholders might have when hearing about company making excessive profits

shareholders as they expect a return on their investment
(dividend payout)
(confidence that profits retained will lead to more profits)
(staff expectation)