Would anybody be able to explain the difference between a life insurance company's free assets and their surplus? Free assets are the assets held over and above the liabilities (which may or may not include supervisory reserves), whilst surplus is the amount held over and above the reserve level. Am I missing something here?
The terms are used interchangeably. The liabilities are the supervisory reserves. The surplus/free assets is the difference between assets and liabilities (including any solvency capital held on top). Hope that helps.
Terminology could get someone really confused when starting out with ST2! Surplus, excess assets, free assets, net asset value. Liabilities, supervisory reserves, provisions, technical provisions. !!!
"Free assets" is usually used to refer to the excess of the value of assets over the value of liabilities on a supervisory basis, with required solvency capital often included along with supervisory reserves. "Surplus" is also used to refer to the excess of the value of assets over the value of liabilities, but is a more general term and so might be based on a more realistic assessment of values instead of a more prudent supervisory assessment. But as mugono said, the terms are often used interchangeably. For the exam, it's best to define what you mean by these terms when you use them in your answer, if it might make a difference to what you're trying to get across to the examiners.
Under Solvency 2, "technical provisions" are the best estimate of the liabilities plus a risk margin. In other places, it might refer to a prudent valuation of the liabilities. However, "provisions" are usually money set aside for something. For example, in the current bank PPI mis-selling scandal, the banks will hold a "PPI provision" which is money set aside to cover the payouts to customers who were mis-sold PPI. Another example is that most companies will hold a "bad debts provision" to cover the risk that people who owe them money don't pay it back.
