a trend of negative regulatory surpluses

[blowfish]

Hi there

Could somebody explain this statement from SmartRevise please?

"A trend of negative regulatory surpluses over time could indicate insufficient prudence in the valuation assumptions, which should be revised."

I thought negative regulatory surpluses mean consistently high liabilities/low assets which could be a result of being overly prudent. So this does not make sense to me.

thanks.

 

[Mark Willder]

Could somebody explain this statement from SmartRevise please?

"A trend of negative regulatory surpluses over time could indicate insufficient prudence in the valuation assumptions, which should be revised."

I thought negative regulatory surpluses mean consistently high liabilities/low assets which could be a result of being overly prudent. So this does not make sense to me.

The regulatory surplus looks at the profit made over the year compared to the reserving basis. The reserving basis will have used prudent assumptions - so we would expect the actual experience over the year to be better than this most of the time. So if we actually get negative surpluses for several years running, this suggests the valuation basis isn't prudent enough.

Best wishes

Mark

 

[blowfish]

Ah.. so this refers a trend of negative surplus 'arising' !

Thank you.

 

[Mike Lewry]

Yes, that's right.

"Surplus" is often used to mean "surplus arising" in practice, so it's important to consider the context to see which interpretation makes most sense.