Analysis of Surplus Questions

[Pulkit Agarwal]

1. My understanding is that Surplus is the extra capital in the balance sheet therefore, change in surplus is what flows from P&L (as the final profit or loss). Is it correct?

2. Now Assuming that actual experience is the same as expected then there could still be some expected surplus. This could be from the difference between expected investment return and discounting rate, correct?
Can it also be from the release of SCR and Risk adjustment? I know that there is an item called "change in reserve" in P&L, which will probably include RA.
So my main question is when there is a change in SCR (most likely decrease) even if experiences are as expected. Will that impact the surplus? If yes then what will be the accounting treatment? Is there an item called "change in SCR" in SII P&L?

 

[Lindsay Smitherman]

1. My understanding is that Surplus is the extra capital in the balance sheet therefore, change in surplus is what flows from P&L (as the final profit or loss). Is it correct?

Yes: 'surplus arising' (= change in surplus over the period) can be called profit. But be careful: we are typically analysing surplus in the supervisory balance sheet (eg under Solvency II or whatever is the relevant regulatory reporting regime), whilst profit reporting is likely being done on a different basis (eg IFRS).

 

[Lindsay Smitherman]

2. Now Assuming that actual experience is the same as expected then there could still be some expected surplus. This could be from the difference between expected investment return and discounting rate, correct?

Yes - and also there would be the expected return on the surplus assets at the start of the period.

 

[Lindsay Smitherman]

Can it also be from the release of SCR and Risk adjustment? I know that there is an item called "change in reserve" in P&L, which will probably include RA.
So my main question is when there is a change in SCR (most likely decrease) even if experiences are as expected. Will that impact the surplus? If yes then what will be the accounting treatment? Is there an item called "change in SCR" in SII P&L?

This might be confusing profit reporting with supervisory reporting.

Under Solvency II there needs to be some 'profit and loss attribution' performed as part of the internal model approval test, but as far as I am aware there is no definition of what constitutes 'profit' for that purpose (eg whether it includes the release of the SCR or not). Maybe one for the practitioners?