What are the two main objectives of the valuation? (Insurance)

There are two main objectives of the valuation (i) to determine the solvency of the insurer and (ii) to determine the distributable surplus amongst the participating policyholders.

(i) To determine the Solvency. The life insurer must find out whether he has sufficient funds to meet the current obligations or not. In case of insolvency, he has to curtail his expenses and increase the income. He has to raise the premium rates and has to stop bonus distribution. Extra-precaution has to be applied in restraining the outflow of funds.

(ii) To determine the divisible Surplus. The excess of receipts over expenditures of a period cannot be regarded as profit of the year because unless all the claims are paid out, insurer cannot know the actual amount of profit. Since the insurer transacts a continuing business, he cannot know the exact amount of profit at a point.

The valuation comes to help the insurer at this stage. The net profit or net loss is estimated through the comparison of net liability at a particular point of time with the available funds at that time.

If the funds are more than the net liability, a part of the excess can be distributed as a bonus or as a dividend to shareholders. How- much will be distributed depends upon the amount of surplus at that time.