Chapter 15

Valuation and Surplus

Slide prepared
prepared by:
by:Abdullah
AbdullahAl
AlYousuf
Yousuf Khan
Khan
Slide
Assistant Professor
Professor
Assistant
IUBAT
IUBAT

McGraw-Hill/Irwin

Copyright 2006 by The McGraw-Hill Companies, Inc. All

rights reserved.

Valuation and Surplus

Valuation 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 Valuation
1. To 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.

2. To determine the divisible surplus;

Valuation can help to know the actual

amount of profit or loss.

1. The Calculation Process

1. Calculation of net liabilities
a. Prospective value
b. Retrospective method
. Bases of valuation of net liabilities;
i.
ii.
iii.
iv.

The mortality rate

Rate of interest
Rate of expense
Bonus rate

1. The Calculation Process

1. Calculation of life insurance fund
2. Comparison of net liabilities with life
insurance fund

Treatment of deficiency
Treatment of surplus

2. Sources of Surplus

Excess interest
Savings from mortality
Savings from loading
Lapses and surrenders
Bonus loading
Miscellaneous sources

3. Difference Between
Surplus and Profit
Surplus

Profit

Surplus is cash in excess of

the liabilities

Profit is the amount which is

left over after meeting all
the expenses.

Surplus is calculated as a
requirement

Profit is derived after

calculating surplus

Surplus is used for various

funds

The remaining (profit) can

then be distributed to the
policy holders

Distribution f surplus is for

business requirement

Distribution of profit is legal

requirement

Not more than 95 percent of

surplus is allowed to create
reserve.

End of Chapter