London-based Benfield brokerage said it has published a report that discusses capital allocation for property and casualty insurance companies from a Best's Capital Adequacy Ratio (BCAR) model approach.
The firm said the analysis “Capital Allocation via a Rating Agency Capital Model” offers a capital allocation methodology that provides management with a consistent framework to measure performance relative to the underlying risk.
Benfield explained that results can be used to measure or gauge:
o Profitability by line of business or division as well as implied rate adequacy.
o Risk baselines by line of business or division and the impact of a change in the perception of risk from a rating agency perspective.
o Risk mitigation strategies such as diversification, use of reinsurance and hedging on capital requirements.
o Strategic decisions to determine the amount of business and product type to target or avoid
o Compensation relative to risk.
The report also describes a proprietary capital allocation model–OptiCap, developed by the Benfield ReMetrics team–that is largely based on BCAR, with assumptions regarding the allocation algorithm.
Kevin Campion, executive vice president and head of the U.S. Benfield ReMetrics team, said, “OptiCap offers a pragmatic approach to capital allocation by incorporating rating agency requirements, which influences most companies' capital management decisions.”
Benfield said the report suggests that using a rating agency capital model approach to ascertain capital adequacy by line of business offers several advantages:
o The standardized nature of rating agency capital models means there will be a high degree of consistency in the allocation algorithm and results interpretation from year to year.
o For many companies, the results are meaningful as capital requirements are heavily influenced by rating agencies and many believe they are overcapitalized to meet those requirements.
o The capital model approach requires a relatively low resource commitment and data requirements are manageable because they are based largely on reported financial results.
A download of the report is available at www.benfieldremetrics.com. More information is available through James.Pogorzelski@us.benfieldgroup.com or Patrick.Matthews@us.benfieldgroup.com.
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