Capital management is critical to a company’s enterprise risk management process. Capital measures can be formulaic, as is the case with S&P’s and A.M. Best’s capital adequacy ratios, or principles-based, such as economic capital.
Economic capital, as defined by Solvency II, is the capital a company should hold such that the probability of technical insolvency during the next year is less than one in 200—a 99.5% confidence level. This definition is consistent with standard tail risk or maximum loss calculations and assumes no new business, full recognition of loss payments over a one-year time horizon and the liquidation of all capital.
Conning’s capital management services include both economic capital analyses and calculations of formulaic regulatory and rating-agency capital requirements. However, we go beyond these approaches and recommend a broad-based multi-stakeholder approach to capital management. This approach balances the competing interests of a company’s stakeholders and assists the management team in making appropriate decisions that optimize capital while avoiding the devastation of extreme risk events.
In a multi-stakeholder approach, a company considers more than just economic capital; it evaluates capital indications across various key financial measures, multi-year time horizons and alternative risk tolerances. Our approach provides a flexible decision-making framework for the capital management process.
Economic Value Impact Assessment
Conning provides modeling and analyses using our integrated risk management system, ADVISE® engine, and assists in evaluating capital considerations such as:
- Return on capital
- Financial leverage
- Fixed vs. floating rate debt
- Reinsurance analyses (see graph)
- Share buybacks
- Shareholder dividend strategy
To learn more about Conning’s capital management services or other strategic advisory services, please contact us.