> Can someone differentiate between stockholders equity, using an assets minus liabilities definition, and surplus for an insurer? How is surplus different than equity?
Surplus = total assets - total liabilities of an insurance company; same as equity for a stock company
>Insurance reserves vs. Surplus
A valuation reserve is an allowance, created by a charge against earnings, to provide for losses in the value
of the assets, much like ”Allowance for bad debts” deducted as accrual expense in normal company to provide for FUTURE ACTUAL loss.
The reserve % varies from asset class to asset class and is determined by National Association of
Insurance Commissioners (NAIC) in the US.
The company needs to evaluate mkt value of assets regularly. If they have to write down –> deduct first to reserve. If losses due to writedown on assets > assets’ valuation reserve , the company needs to charges the excess directly as a reduction in surplus.
This reserve requirement applies for life insurance companies, not casual insurance companies, i.e., no need to charge an allowance in advance, but all loss to writedown will go directly to surplus.
The accumulated valuation reserve is shown as liabilities on the balance sheet.
Insurance regulators worldwide have been moving toward risk-based capital (RBC) requirements to assure that companies maintain adequate surplus to cover their risk exposures relating to both assets and liabilities, i.e., no need to charge a reserve before hand but the surplus must be high enough to tolerate loss based on risk assessment of the portfolio.
> Liquidity reserve vs. Insurance reserves
No relation with each other. Liquidity reserve is just liquid assets firms hold to meet their (unexpected) cash needs.
>Positive interest spread (ie. interest earn - specified rate credited to reserve a/c) goes to surplus
net interest spread is the difference between interest earned and interest credited to policyholders. This results in positive financial income and goes to surplus.