Definition of Insurance Surplus

Insurance companies earn profits by taking in more money in premiums than they pay out in claims to policyholders. Any excess profits earned by the insurer are referred to as a surplus.

Insurance companies are required by state laws to hold a certain amount of funds in reserve to ensure they always have enough money on hand to pay claims. A surplus is any amount over and above the reserve level.

Insurance companies can accumulate a surplus is a number of ways. Examples include interest and dividends earned on investments, surrender charges gained from cashed-in policies, sales fees and lower claims payouts than anticipated.

A large surplus is often a sign that an insurance company is profitable and in good financial health. Some insurance companies will use a surplus to award shareholders or policyholders in the form of dividends. It could even elect to lower premiums as a way to attract and retain policyholders.