Sources of Surplus in Life Insurance

1. Excess Interest

While calculating the net liabilities, a certain rate of interest is assumed; but if the insurer gets more than this rate, the surplus is originated.

In other words, the excess of actual interest over the assumed one gives rise to surplus. Sale of securities at more than the book value also contributes to the surplus.

2. Savings and Mortality

If the actual rate of mortality is lesser than the assumed rate of mortality, surplus is created by the excess amount. It has been observed that the mortality rate assumed in calculation of policy value has always been lesser than the actual death-rate.

Has the former been higher than the latter one, there would be a deficiency, but the insurer, to avoid the deficiency, assumes a very conservative rate of interest.

The savings from mortality act in three ways to induce surplus. Firstly, lesser death causes higher amount of premium which shall be received from the persons more than the expected one.

Secondly, lesser payment of claims on account of lesser death causes Surplus to a great extent.

Thirdly, the extra-premium will not be required due to death less than the expected one.

3. Savings from Loading

A certain amount is added to the net premium to obtain the office premium for meeting the expenses of the insurance business. If this assumed loading is more than the actual expenses, surplus will arise.

4. Lapses and Surrenders

Early termination of policy during policy-life may give rise to surplus, if the surrender value given is less than the reserve accumulated or amount of surrender to be given.

Actually, this is not surplus because the excess amount will be requires to meet the losses on account of surrender.

5. Bonus Loading

On participating policies, bonus loading is added to declare at least a certain minimum rate of bonus. The unutilized portion of it along with interest thereon is added to surplus.

6. Miscellaneous Sources

Saving in various types of annuity contract may give rise to surplus.

Similarly in pure-endowment or Term Insurance, some amount may remain unpaid, which will be taken as as surplus.