Optimizing Insurance Company Capital Needs to Be Ongoing Process

Insurance companies need capital to absorb losses from expected events, unexpected but foreseeable events and unexpected unforeseen events in order to meet their obligations to policyholders and other stakeholders

Insurers protect their policyholders from financial losses associated with risk, including:

Insurance risk – property damage, bodily injury, legal liability, early death, disability, illness and longevity
Volatility risk – the volatility of financial markets and/or the incidence of insurance risk – i.e.,, the unexpected occurrence of foreseeable loss events

Capital Management Involves Four Basic Steps:

Determining Required Capital – how much capital does the company need to survive the risks it has assumed at a selected probability
Optimizing Required Capital – minimize the capital needed to absorb those risks
Funding Required Capital at Optimal Cost – obtain capital at the lowest effective cost to owners
Maintaining Financial Flexibility for Foreseen and Unforeseen Events – have a margin for error that provides the company:
Incremental capital for error in its risk models
Capacity to raise additional capital at reasonable terms when needed

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech ActiveAllocator.com, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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