12

Valuation and Surplus

Slide prepared by: Abdullah Al Yousuf KhanAssistant ProfessorIUBAT15

ChapterMcGraw-Hill/IrwinCopyright 2006 by The McGraw-Hill Companies, Inc. All rights reserved.110/22/2014Slide prepared by:AAYKValuation and SurplusValuation is a process to value the net liabilities of a life insurer as on a particular date.It determines the total amount of reserves that an insurer must have to meet its obligation. The valuation, firstly, determines the total net liabilities of the insurer and, secondly, compares its liabilities with the available funds. It measures whether the insurer has sufficient funds to meet its obligation or not.Purpose of ValuationTo determine the solvency;Must have sufficient funds to meet the obligation. In case of insolvency, it must cut its expenses and increase its income. Raise the rate of premium and stop paying bonus.To determine the divisible surplus;Valuation can help to know the actual amount of profit or loss.1.The Calculation ProcessCalculation of net liabilitiesProspective valueRetrospective methodBases of valuation of net liabilities;The mortality rateRate of interestRate of expense Bonus rate1.The Calculation ProcessCalculation of life insurance fundComparison of net liabilities with life insurance fundTreatment of deficiency Treatment of surplus2.Sources of SurplusExcess interestSavings from mortalitySavings from loading Lapses and surrendersBonus loadingMiscellaneous sources3.Difference Between Surplus and ProfitSurplusProfitSurplus is cash in excess of the liabilitiesProfit is the amount which is left over after meeting all the expenses.Surplus is calculated as a requirementProfit is derived after calculating surplusSurplus is used for various funds The remaining (profit) can then be distributed to the policy holdersDistribution f surplus is for business requirement Distribution of profit is legal requirementNot more than 95 percent of surplus is allowed to create reserve.End of Chapter