Surplus funds
Accumulated profits in with-profits life insurance that the insurer is not required to distribute to policyholders in the short term: excluded from technical provisions and counted as Tier 1 own funds.
A French life insurer has EUR 3 billion in profit-sharing reserve, set aside from past years' results to be redistributed to policyholders. What do those 3 billion represent under Solvency II: a debt to policyholders or a cushion for the insurer? The answer changes its ratio. Article 91(2) of Directive 2009/138/EC says that accumulated profits in a with-profits fund, which have not been called for distribution to policyholders, constitute surplus funds. As long as they are not owed, they stay outside technical provisions and become, under conditions, Tier 1 basic own funds. The substantive condition is that the insurer is not obliged to distribute them in the short term and can use them to absorb losses. In France, the profit-sharing reserve is the bulk of the matter: part of it is counted as surplus funds for the fraction the insurer shows it will not have to pay out in the short term, whereas the insurance code requires the reserve to be paid out within eight years. Surplus funds must be consistent with the future discretionary benefits used in the best estimate, otherwise the same sum would be counted twice, in liabilities and in own funds.
Life insurer: profit-sharing reserve of EUR 3,000M on the statutory balance sheet. It shows that it will not have to pay out EUR 900M of this stock within eight years, and that this amount is available to absorb a loss. Surplus funds retained: EUR 900M, in Tier 1. The remaining EUR 2,100M is treated as a debt to policyholders in the best estimate. Those EUR 900M are added to Tier 1 own funds, and the liability in the best estimate falls by the same amount.
surplus funds, accumulated undistributed profits, Article 91 Solvency II, life surplus funds, with-profits surplus
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