Capital allocation

Document description

No explicit terms of reference were given for the Working Party but these have been taken as follows:

1. To consider the reasons for the allocation of capital of an Insurance/Reinsurance company between product lines or portfolios of risks written by that company.

2. To review the effectiveness of the methods available for allocating capital and to identify the key factors that affect the allocation and over time.

Inevitably these lead into many related issues and widen the subject matter considerably, particularly into the realm of solvency levels required to support the writing of each class of business. This is considered outside of the scope of the working party as it falls more naturally into the working party dealing with solvency. Therefore we have considered only relative capital allocation on the assumption that the capital in total will support the business written in the period.
In addition to avoiding the question of the absolute level of solvency, the working party has focused more on capital allocation to support the risk inherent in underwriting activities of the company rather than others such as those arising from investment policy exchange rates and security of reinsurers.
In some circumstances, the risk in these other activities can be of a similar level, if not more than the underwriting activities. We also explored the general framework for considering the risks from whatever source.