The Control Cycle: Financial Control of a Life Assurance Company

Extract

The intention of this paper is to describe, by way of example, how profit testing is carried on in practice and how by making it central to the company's operation the company may be controlled. The mechanism of control is to test the company's results against the results of profit tests built into a model of the company. We shall also describe how the results of these tests of the company's results are fed back into the profit tests to establish the basis for future tests of the company's results.

The motivation for this paper arose from the need to communicate to shareholders the links between profit testing and the company's actual results. It is all very well to say to shareholders that the products satisfy a certain profitability standard but how does that show itself and how real is that profitability paticularly for a new or expanding company which displays nothing but statutory losses or, at best, break even? This communication also led to the need to explain variations from the original projections and finally to answer the question: what happens to profitability if these variances continue?