Preliminary report of the Capital Allocation Working Party

Document description

Capital enhances security, for which a higher premium may be charged. Risk can be fully characterised using a statistical distribution. Capital Allocation and Capital Setting are key to good management in the insurance industry. Current risk measurement techniques, which essentially collapse or summarise the risk distribution, are inadequate. Good capital allocation methods, best suited to different parties with different perspectives on risk control, already exist. Capital allocation and capital setting lie at the heart of risk transfer, providing a common basis for the insurance and banking industries. Convergence between insurance and banking is proceeding, but differences persist (and can be expected to do so for some time). Risk management and capital management are basically a means of achieving a profitable return. The 'risk : return' relationship is captured by the investment and reinsurance markets.