Valuation and Surplus, Basis of Valuation of Net Liabilities, Sources of Surplus, Excess Interest, Savings from Morality, Savings from Loading, Lapses and Surrenders, Bonus Loading, Miscellaneous Sources, Methods of Distribution of Surplus, Uniform Bonus Plan, Contribution Method, Classification of Bonus

1. UNIT 5 VALUATION
AND SURPLUS
BY
DESI PRIYA V
ASSISTANT PROFESSOR
ETHIRAJ COLLEGE FOR WOMEN

2. VALUATION
 Net liabilities of an insurer
 Total amount of reserve
 Sufficient funds to meet the obligation

3. PURPOSE OF VALUATION
1) To determine the solvency
 Sufficient funds to meet the current obligation
2) To determine the divisible surplus
 Comparison of net liability with available funds at particular point of time
 Excess – distribution of bonus or dividend to shareholders

4. CALCULATION PROCESS
 Comparison of insurance funds with net liability
 Surplus or deficiency
1. Calculation of Net Liabilities
 Prospective method (present value required) or retrospective method (value
accumulated)
 Same result
 Policy value
 Gross premium

5. CONTI……
PROSPECTIVE METHOD
 PV of future claim – PV of future premium = Net Liability
 Always excess
 Gross premium
RETROSPECTIVE METHOD
 Premium accumulated
 Life values (Reserves)

6. 1. BASES OF VALUATION OF NET
LIABILITIES
 Calculation of premium rates – mortality rates, interest, expenses and bonus loading on
past experiences
 Calculation of NL – future estimation
 Bases of calculation:
1. The Mortality Rate
2. Rate of Interest
3. Rate of Expenses
4. Bonus Rate

7. 2. CALCULATION OF LIFE INSURANCE
FUND
 Revenue account of the insurer
 Credit side – all incomes including premium, interest , rents etc
 Debit side – all payments including policy claims, annuities, management expenses
 Difference – Life Insurance Fund
 Life Insurance Reserve
 Fund – actual amount with the insurer & Reserve – NL of the insurer

8. 3. COMPARISON OF NET LIABILITIES
WITH LIFE INSURANCE FUND
 Surplus
 Deficiency
 TREATMENT OF DEFICIENCY
 TREATMENT OF SURPLUS

9. SOURCES OF SURPLUS
1. EXCESS INTEREST:
 Excess of actual interest over assumed interest
 Sale of securities more than book value
2. SAVINGS FROM MORTALITY:
 Actual mortality rate lesser than assumed rate
 3 ways to induce surplus
3. SAVINGS FROM LOADING:
 Assumed loading more than actual expense
4. LAPSES AND SURRENDERS
 Early termination of policy

10. CONTI….
5. BONUS LOADING:
 Unutilized portion of bonus along with interest
6. MISCELLANEOUS SOURCES:
 Annuity contracts, pure-endowment and term insurance

11. DIFFERENCE BETWEEN SURPLUS AND
PROFIT
 SURPLUS – excess funds over net liabilities
 PROFIT – remaining of surplus
 DIVISIBLE PROFIT – SEC 28 of the LIC Act, 1956, not less than 95% of the surplus
of the Corporation shall be allocated to or reserved for the policy holders of the
corporation.

12. BASES OF ALLOTMENT OF PROFIT
1. SIMPLICITY
2. EQUITY
3. SUITABILITY
4. POPULARITY
5. FLEXIBILITY

13. METHODS OF DISTRIBUTION OF
SURPLUS
1. UNIFORM BONUS PLAN:
 Uniform bonus rate to all policyholders
 Policy amount
 Example: Rs. 25 per 1000 on whole life policies have been declared as bonus
 Higher the policy amount higher the bonus declared
 Bonus Rate = Total amount of divisible profit * Amount of insurance of RS.1000 /
amount of insurance under participating policies
 Duration of the policy

14. CONTI……
2. CONTRIBUTION METHOD:
 Principle of this method
 Higher the contribution higher the bonus declared
 Two things taken into account
 Equity principle adopted

15. CLASSIFICATION OF BONUS
1. BONUS ON THE BASIS OF CALCULATION
2. BONUS ON THE BASIS OF VESTING
3. BONUS ON THE BASIS OF RESULTS

16. BONUS OPTIONS
1. CASH BONUS
2. REVERSIONARY BONUS
3. REDUCTION IN PREMIUM BONUS
4. ACCUMULATION AT INTEREST BONUS
5. ENDOWMENT OPTION

17. THANK YOU