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.

RELATED TERMS
  1. Capital Surplus

    Capital surplus is equity which cannot otherwise be classified ...
  2. Adjusted Surplus

    Adjusted surplus is one indication of an insurance company's ...
  3. Surplus Spending Unit

    A surplus spending unit is an economic unit with income that ...
  4. White List States

    White List States are those that permit the addition of specialized ...
  5. Net Premiums Written To Policyholder ...

    Net Premiums Written To Policyholder Surplus is a ratio of an ...
  6. Consumer Surplus

    Consumer surplus is an economic measure of consumer satisfaction, ...
Related Articles
  1. Investing

    Understanding Consumer Surplus

    Consumer surplus is an economic measure of consumer satisfaction, which is calculated by analyzing the difference between what consumers are willing to pay for a good or service, relative to ...
  2. Managing Wealth

    3 Reasons To Buy Government Surplus for Your Small Business

    Learn why it's wise to access government surplus auctions to buy furnishings, equipment and other items to start a new business or expand an existing business.
  3. Investing

    Finding Dirty Surplus Items on an Income Statement

    Dirty surplus items skew net income. Knowing how to account for them gives you a cleaner picture.
  4. Investing

    What's the Balance of Trade?

    The balance of trade is the difference between the value of all the goods and services a country exports and the goods and services it imports.
  5. Insights

    Why Deficits Are Flawed Measures of Unfair Trade

    Trump’s obsession with erasing the $500B U.S. trade deficit is flawed economics, experts say.
  6. Financial Advisor

    5 Companies Benefiting From Germany's Record Surplus

    A weaker euro is boosting German exports, which have led to a record trade surplus. Here are five German companies reaping the benefits.
  7. Investing

    OPEC Reports First Budget Deficit in 18 years

    OPEC budget swings to $99.6 billion deficit in 2015 from $238.1 billion surplus as oil plunges
  8. Investing

    The History Of The T-Bill Auction

    Learn how the U.S. found the perfect solution to its debt problems and ended up creating one of the largest markets in the world.
  9. Investing

    Understanding Capital And Financial Accounts In The Balance Of Payments

    The current, capital and financial accounts compose a nation's balance of payments, indicating the state of its economy and economic outlook.
RELATED FAQS
  1. What's the difference between the current account and the capital account?

    Both accounts relate to the balance of payments of a nation. One considers goods and services currently produced, the other ... Read Answer >>
  2. Par value vs market value

    Learn about the difference between the par value and market value of financial securities, including the role they play in ... Read Answer >>
  3. What is the difference between financial capital and economic capital?

    Read about the differences between types of financial capital, which companies use to raise money, and economic capital models ... Read Answer >>
  4. What are the main benchmarks that track the banking sector?

    Read about the most important benchmarks that can be used to track the banking sector, and why banking benchmarks tend to ... Read Answer >>
Trading Center