Insights · Actuarial consulting

Analysis of surplus as a management report, not a submission

An analysis of surplus is built, in most life offices, to satisfy a regulator. It reconciles opening to closing own funds through a defined sequence of steps — the walk — it balances, and it goes into the submission. Then somebody asks the executive committee to look at it, and the room does not know what to do with it.

This is not a presentation problem. The regulatory walk and the management walk answer different questions, and the order of operations that satisfies one obscures the other.

Different questions

The submission asks whether the movement in own funds is complete and correctly attributed. Completeness is the constraint, so the walk is exhaustive and the residual must be small.

Management asks something narrower and harder: which of these movements did we cause, which happened to us, and which will recur? A step that is material and entirely outside management control — a market movement, say — deserves prominence in the submission and a single line in the management view. A step that is small but wholly controllable and repeating deserves the reverse.

Completeness is what makes a submission defensible. It is also what makes a management report unreadable.

What changes in the rebuild

• Group by controllability rather than by valuation step. Experience variance, assumption change, new business strain, and market and economic effects, in that order.
• Separate recurring from one-off inside each group. The executive question is almost always what this implies for next year.
• Carry the experience variances back to the investigation. A mortality variance is more useful when it is placed next to the actual-versus-expected result that will drive next year's basis.
• Say what would have to be true for a step to repeat. One sentence per material item is usually enough, and it is the part that gets quoted afterwards.

The reconciliation still matters

None of this means two sets of numbers. The management view should reconcile exactly to the submitted walk, and the reconciliation should be shown. The moment the two diverge without explanation, the executive committee stops believing either one, and getting that back takes considerably longer than building it properly the first time.