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Surplus and surplus management (factors to consider in distributing…
Surplus and surplus management
reasons for analysing surplus (DIVERGENCE)
factors to consider in distributing surplus (benefit schemes and life insurance)
constitution of company
mutual- 100% to policyholders
proprietary- split between shareholders and policyholders (if with-profits) or 100% shareholders (if not with-profits)
provision of capital
margins for adverse experience
business objectives
maximising distributions to improve competitive position (and generate business) vs maintaining surplus (as a cushion against risk, for writing new business and investment freedom)
policyholders' expectations
legislation
tax
Scheme rules
Discretion of the sponsor
risk
pace of distribution of surplus
preserving industrial relations with members and other employees
whether member contributes to scheme or not
sources of the surplus
sources of surplus and levers on surplus
demographic factors
mortality/morbidity
withdrawals
new business volumes/new business mix
economic factors
premiums received
expenses, including commission
inflation (price and salary)
claim amounts
investment income and gains
tax
Levers on surplus are factors that management can use to control the amount of surplus arising
controlling claim frequency
monitor claims experience
good underwriting of new business
good claims management systems
eligibility criteria
tight policy wording
no claims discount systems
policy excesses
controlling claim/benefit amounts
monitor claims experience
reinsurance
good claims management systems
reduce future benefit payments
tight policy wording
keep guarantees and options to a minimum
policy excesses
controlling expenses
expense budgeting and monitoring
variable charges/premiums
ensure that underwriting and claims expenses are commensurate with the size of the claim
policy excess so that small claims (and the associated expenses) are avoided