Surplus management

What Is a Surplus?
A surplus is the amount of an asset or resource that exceeds the portion that's
actively utilized.

Total amount of asset or resource - amount utilized =surplus.

Now surplus can mean different things in different contexts.

For example
If we talk about inventories, a surplus is the product that remains
unpurchased.
similarly
If we talk in budgetary terms, a surplus occurs when income earned exceeds
expenses paid.
A budget surplus can also occur within governments when there's leftover tax
revenue after all government programs are fully financed.

So, this is all about surplus,

Now coming back to the main question
What is surplus management?
So, surplus management means pre-determining the amount for surplus and
then allocating or utilizing it by line of business.
It is a
very complex problem because, surplus management starts with predicting or
forecasting the surplus, which only gives an logical estimate but not the exact
value of the surplus.
And even after determining the surplus a lot of problems arise in its next step
which is its management
Such as finding.
Various forms in which the surplus needs to be invested
The relation of maintenance expenses to the surplus.
And the methods by which the surplus is distributed to the stockholders.

There are 3 fundamental methods of surplus allocation, namely

Reserve method, duration method and variation method.

Reserve method is the easiest method, in which surplus is distributed based

on loss reserves and unearned premium reserves.
Allocating surplus according to the volume of business per line is a logical
choice since surplus is committed when the policy is written and released
when the loss is paid.
If it is a stable book of business, the loss reserves and unearned premium
reserves will remain relatively constant from year to year.

Duration method is perceived to be superior to reserve method,

since duration considers payment pattern changes and interest rate changes
in the calculation.
Longer tail lines receive relatively more surplus to cover the larger potential
volatility in the payment pattern.
(Duration is a time value weighted pay-out length. In other words, duration is a
weighted average term to completion where the years are weighted by the
present value of the related cash flows.)

Variation method is a forward-looking method on what may happen. Loss

reserves are already set up to cover losses that have occurred. Surplus exists
for unexpected events or variations from the norm. This method uses standard
deviations on a comparable basis among lines of business to distribute
surplus.
So, this was my understanding of the term surplus and surplus management.
Thank you everyone for listening.