WHAT IS A 'Benchmark Surplus'

Benchmark surplus is an insurance term that refers to the amount of surplus from an additional capital source, which necessarily acts as a supplement to the company's cash flow.

BREAKING DOWN 'Benchmark Surplus'

Benchmark surplus would be required when unforeseen contingencies occur that could disrupt or impair the cash flow necessary for an insurance company to make future benefit payments for which it has already received the premiums.

Benchmark surplus refers to any needed additional equity or surplus beyond what is currently held by an insurance company or industry. Equity refers to the value of an asset, and benchmark surplus includes the liquid assets required in addition to those currently currently held, that an insurance company would need to cover additional benefit claims.

In other words, when unforeseen obstacles, such as clerical errors or difficulties processing premium payments, disrupt the cash flow required to make future benefit payments by an insurance company, the additional flow, known as the benchmark surplus, is used.

Benchmark Surplus vs. Capital Surplus

Benchmark surplus and capital surplus are similar concepts with a few key differences. Benchmark surplus is an insurance term used to refer to the additional equity or capital a company may tap into when dealing with a decrease in cash flow. A capital surplus refers to equity or net worth otherwise not classifiable as capital stockMost commonly, it arises when a corporation issues common stock and sells it for more than the par value of the stock, which is also called a premium.

Capital surplus can be created in a number of ways including from stock issued at a premium or stated value, from the proceeds of stock bought back and then resold again, from a reduction of par value or reclassification of capital stock, from donated stock or from the acquisition of companies that have capital surpluses. Par value is the original price at which a company's shares were initially offered for sale. Capital stock can serve as an umbrella term for more specific classifications such as acquired surplus, additional paid-in capital, or donated surplus.

For example, say a company sells 100 shares of its $1 par value stock for $9 per share, it would record $100 of the $900 in total proceeds in the common stock account, and $800 in the capital surplus account.

Capital refers to anything that generates income, such as financial assets or their financial value, as well as the tangible factors of production. Capital comes in many forms, like currency, equipment, land or even people.

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