How much Capital Do you Really Need?
Insurers all hold capital as a cushion against losses. But how much capital is enough?
There are three criteria that management use to determine how much capital needs to be held:
- Level of Risk
- Regulatory Requirements
- Market Expectations
In a perfect world, those three criteria would all be the same. But in this world, they are not. The answer to the “How Much Capital?” question gets a different answer from each of those criteria. And it varies for different risks, which is the most restrictive.
RISKVIEWS has always been of the opinion that management needs to juggle the three points of view so that the capital is adequate in total to meet all three, but they may well have an opinion about one or several risks that it has a much less lower level of risk and therefore lower need for capital than may be indicated by either the regulators or the market. That kind of view is a natural consequence of the fact that management has more expertise and insight into some of its risks than either outside view.
The WillisWire series on ERM practices continues with a discussion of Risk Capital.
RISKVIEWS has of course posted often about Risk Capital as well. Over 40 posts can be found at: