What is the definition of 'surplus' in the context of insurance?

In the context of insurance, 'surplus' refers specifically to the funds that exceed the liabilities and capital needed for policyholder protection. This surplus represents the amount of financial cushion that an insurance company possesses beyond what is required to meet its obligations for policyholder claims. It is essential because it signifies the insurer's financial strength and capacity to cover unexpected losses or claims.

Surplus funds can be seen as a safety net that allows an insurance company to operate effectively, absorb shocks from large or unforeseen claims, and support continued growth or investment in new opportunities. This definition underscores the importance of sound financial practices in the insurance industry, where having sufficient surplus ensures that the insurer can honor its commitments to policyholders even in adverse situations.