Surplus Allocation: A DFA Application

Surplus allocation has been requested from actuaries many times over the years. There are those who feel surplus allocation of any sort is incomprehensible. Since actuaries are asked to allocate surplus, we need to ensure the processes being used are sound. It is such a request from upper management that sent the author looking for the methods employed by others and pondering what additional methods could be constructed. This paper reviews reserve and duration based allocation methods and then ventures into devising an alternative method based on variation. A brief discussion is also included on what surplus amount should be used.