How Much Capital Does a Reinsurance Need?

• Published in: Geneva papers on risk and insurance. Issues and practice 2009-04, Vol.34 (2), p.159-174
• Main Authors: Besson, Jean-Luc, Dacorogna, Michel M., de Martin, Paolo, Kastenholz, Michael, Moller, Michael
• Format: Article
• Language: English
• Subjects: Allocations; Balance sheets; Business risks; Business structures; Capital; Capital investments; Capital management; Capital markets; Capital needs; Capital requirements; Corporate profits; Economics and Finance; Equity; Finance; Financial institutions; Insurance; Insurance premiums; Investment risk; Investors; Policyholders; Portfolio management; Profitability; Reinsurance; Risk capital; Risk Management; Securities markets; Shareholders; Solvency; Stakeholders; Stockholders; Studies
• ISSN: 1018-5895; 1554-964X; 1468-0440
• DOI: 10.1057/gpp.2009.8

A modern reinsurance company needs to manage its capital efficiently. The problem is that there are many views on capital, depending on the various positions of the stakeholders of the company involved. In this paper, we present a consistent way of defining capital and of managing it, taking into account the view of all stakeholders. We answer the question of how much capital is required by the business, and introduce the notion of buffer capital. This is used to reduce the likelihood of the company having to call too often on its shareholders to refurbish its capital. We show how this concept relates to the setting of return on equity objectives for the company. Capital allocation is the driver for measuring the economic performance of a business. The fixing of limits relating to capital consumption is linked to capital allocation because it preserves the diversification of the book. We advocate the use of the internal model to determine all of these parameters, and to set the stage for good enterprise risk management within the company.