Safety of Structured Settlement Annuity Issuers | What Is Surplus?

by John Darer CLU ChFC MSSC RSP CLTC

What Does Insurance Company Surplus Mean?

• Surplus equals Admitted Assets minus Liabilities. 
• Surplus represents the net worth of an insurer.
• Surplus is one view of a life insurance company's health. 
• Structured settlement annuities are issued by life insurance companies.
• Surplus is one indicator of an insurance company’s financial health. It gives an insurance company another source of funds, in addition to its reserves and reinsurance, if it needs to pay a higher than expected amount of claims.

What Are Reserves?

The purpose of the reserve requirement is to ensure that if a catastrophic event were to happen, with a large percentage of policyholders affected, the company would have enough money to meet the claims. Here is a good basic article on Financial Web that explains how Insurance Company Reserve Amounts Are Determined.

One way to think of surplus is a Rainy Day Fund, for the Rainy Day Fund  (reserves).

Generally there are two minimum requirements for insurers - minimum capital requirement and initial free surplus.

The minimum capital requirement is the bare minimum surplus you can ever have.
The initial free surplus is the safety buffer you have to have when starting a new company.

Every state will have its own solvency regulation  [see Statutory Minimum Capital & Surplus Requirements, from the Uniform Certificate of Authority Applications,  National Association of Insurance Commissioners (NAIC) 2017]. Insurers are also subject to rosk based capital requirements.

For example here are the minimum capital and surplus requirements for life insurers in CONNECTICUT:

                                           CAPITAL                SURPLUS                 MUTUAL SURPLUS

Life insurance                        $1,000,000             $2,000,000               $3,000,000

 (12/09) CGS §38a-72, Reg. 38a-72-1 to 38a-72-13

The NAIC’s Life Actuarial (A) Task Force was formed to identify, investigate and develop solutions to actuarial problems in the life insurance industry. For 2017, the Task Force is charged with reviewing and recommending changes to Actuarial Guideline XLIII (AG43) and continuing the development of VM-22, Requirements for Principle-based Reserves for Non-Variable Annuities. The Task Force is considering modifications to the determination of the maximum valuation interest rate for single premium immediate annuities (SPIAs). [ Source: NAIC February 6, 2017 update]

Surplus of Structured Settlement Annuity Issuers as a % of general account assets   [as of Year End 2015  Source: Vital Signs Suite/Ebix Exchnage]

American General                                          8.8%       

Berkshire Hathaway Life of NB                      25.2%           

Liberty Life Assurance of Boston                     6.7%

Metropolitan Life Insurance Co.                      7.2%

New York Life Insurance Company                 14.4%

Pacific Life Insurance Company                     14.4%

Prudential Insurance Company of America      11.6%

United of Omaha Life Insurance Company         9.5%

United States Life Ins. Co in City of NY           10.41%

 

 Image source: Funnfun.in