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

Dr. Bender has made the results obtained in Mr. Bingham’s paper more accessible by focusing on the essential elements that influence measurement of return, and by providing a variety of detailed examples. In addition, Dr. Bender has extended the work in several directions. Several of the results obtained in Dr. Bender’s discussion paper are fundamental to the study of surplus and return on equity (ROE). In particular, Dr. Bender describes two basic tests of reasonableness that can be applied to any rate-of-return model in order to check the model’s soundness. Because of their universal applicability, these tests are a major contribution. Two major results presented in the discussion are: 1) the three measures of return discussed in the paper are equal to each other under a specific earnings release pattern, and 2) one of the measures (the NPV ratio) is constant with respect to the earnings release pattern. As will be discussed below, there are some ac-counting issues that must be dealt with in order to make use of these results, and they do not generally hold true for a model that does not include reserve margin (or some equivalent mechanism). Despite this caveat, Dr. Bender’s paper contains other important findings, and represents a substantial contribution to the actuarial literature on surplus and profitability measurement.