Capital management is critical to a company’s enterprise risk management process. Capital adequacy is one component of capital management and is defined variously by U.S. and European regulators and rating agencies. Capital measures can be formulaic, such as 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 broader-based multi-stakeholder approach to capital management. This approach balances the sometimes competing interests of a company’s stakeholders and assists management 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
In advising our clients on sound capital management practices, we provide modeling and analyses using our financial integrated risk management system, FIRM®, and assist in evaluating such capital considerations 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 adequacy and capital management services or other strategic advisory services, please contact us.