Surplus - Concepts, Measures of Return, and Determination [Discussion]

If the purpose of policyholder surplus is to provide a cushion against possible errors in the estimation of balance sheet assets and liabilities for an insurance company, then surplus is required wherever estimation errors might exist, regardless of their source. In particular, the balance sheet contains estimates of liabilities due to the runoff of previously written policies as well as due to current business. For that reason, the required or "benchmark" surplus that appears on a given balance sheet should be allocated to the exposure period (e.g., policy year, accident year, contract year, etc.) that gives rise to the uncertainty. Surplus; Return on Equity; Leverage