First Intermediary to Launch Tool That Optimizes Capital Within Rating Agency Guidelines
MINNEAPOLIS, MN – Benfield, the world’s leading independent reinsurance and risk intermediary, announced today the publication of its report, Capital Allocation via a Rating Agency Capital Model, that discusses capital allocation for P&C insurance companies from a Best’s Capital Adequacy Ratio (BCAR) model approach.
The report offers a capital allocation methodology that provides management with a consistent framework to measure performance relative to the underlying risk. Results can be used to measure or gauge:
Profitability by line of business or division as well as implied rate adequacy.
Risk baselines by line of business or division and the impact of a change in the perception of risk from a rating agency perspective.
Risk mitigation strategies such as diversification, use of reinsurance, and hedging on capital requirements.
Strategic decisions to determine the amount of business and product type to target or avoid.
Compensation relative to risk.
In addition, the report 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.
“OptiCap offers a pragmatic approach to capital allocation by incorporating rating agency requirements, which influences most companies capital management decisions,” said Kevin Campion, Executive Vice President and head of the US Benfield ReMetrics team.
The report debates that using a rating agency capital model approach to ascertain capital adequacy by line of business offers several advantages:
The standardized nature of rating agency capital models means that there will be a high degree of consistency in the allocation algorithm and results interpretation from year-to-year.
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.
The capital model approach requires a relatively low resource commitment and data requirements are manageable because they are based largely on reported financial results.
Benfield is the world’s leading independent reinsurance and risk intermediary. Its customers include many of the world’s major insurance and reinsurance companies as well as government entities and global corporations. Benfield operates from more than 50 locations worldwide. The company is listed on the London Stock Exchange under the ticker symbol BFD. For more information, visit www.benfieldgroup.com.
