The term surplus generally refers to a number in excess of what is needed. It means the quantity that remains when the need or use of a particular supply is gratified. It may also be regarded as excess.
In the government, a surplus indicates a figure in public treasury funds that is larger than what is necessitated for regular government purposes at a given time. Surplus is also a term widely used in economics for various related measures. When imports are exceeded by exports, a surplus occurs.
In accounting, surplus depicts a different meaning. It is the difference obtained by deducting the company’s total liabilities from the total assets; the remainder of receipts in excess of expenses; and the difference between a company’s net assets and the capital stock’s face value.
The term deficit is the reverse of surplus. It happens whenever a sum or amount of money falls short of the quantity required.
In insurance, the term surplus characterizes diverse meanings. A surplus account signifies an insurance company’s assets less its liabilities. The term surplus lines, in the regular insurance market, means an insurance coverage that is unavailable from a company which was admitted in the said market.
On the other hand, in the reinsurance market, surplus lines imply a contract between the ceding company and the reinsurer that has an agreement based on the former’s line guide, in which case the reinsured amount is expressed in number lines. The number line is the retention amount’s terms of multiples.
Example, a ceding company issues an insurance policy for $50,000 and maintains $12,500, or one-fourth of the total amount. The outstanding $37,500 is then transferred to the reinsurer company. This illustrates the three line surplus as the insurer transfers an amount line to the reinsurer three times more than how much he retains.
In addition, insurance companies measure its financial strength by way of surplus adequacy ratio, which is computed by dividing its adjusted surplus by adjusted liabilities. A high ratio for surplus adequacy depicts superior financial strength used to cover benefit compensations.
Meanwhile, a policyholder’s surplus means the remainder of the assets of an insurance company after deducting all of its liabilities to be able to provide the benefits expected to policyholders. It is the insurer’s net worth as shown in its financial statements. It is also considered as a financial support to protect the policyholders against unexpected predicaments.
To compute for policyholder surplus, the total paid in capital, paid in surplus, and contributed surplus, adding in contingency reserves accomplished voluntarily, are added. It can also be computed by subtracting total liabilities from total assets that have been admitted.
A change in policyholder surplus portrays a change in percentage of the previous year’s policyholder surplus, drawn from investment gains, operating earnings, contributed capital at net, and similar other sources.
Minority interests; stockholder’s equity, comprising of common stock, other comprehensive income, additional paid in capital (APIC), and retained earnings, in which case the equity must not include minority interests; and an equity substitute, specifically hybrid capital, are the accounts usually included in the policyholder surplus of a company.