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in BUS 4027W - Actuarial Risk Management by (1k points)

In the Surplus Management chapter there is a part (section 4: distribution of any surplus arising) which states that for a with-profit insurance company the maximum distributable surplus proportion can be determined by the constitution or by legislation. 

I'm trying to understand what the purpose of this is? 

1 Answer

+1 vote
by (800 points)

I would think that this is to ensure that the insurance company is better positioned to continue paying out their policyholders. A surplus arising in one period might not be sustained and the distributed surplus shouldn't be overly high such that future periods are jeopardized. So, some of the surplus is essentially held back as security for future periods. IFRS refers to an 'Unallocated Distributed Surplus' fund which can be used as a regulatory smoothing mechanism, or for future allocation to shareholders/policyholders.

Government may also want to incentivize that some of the surplus is distributed to shareholders (as well as policyholders) - to incentivize investment in insurance companies and the health of the financial sector - so by limiting the maximum proportion, legislation is ensuring some of the surplus arising is available for shareholders.