Capital Allocation

Many companies see allocation of capital as a tool for strategic management decisions.  Those companies with an internal model for assessing capital adequacy are now asking how the model can be used for allocating capital in a consistent way, typically for the following uses:

• Risk Management – identifying risk drivers, and devising risk transfer and mitigation strategies

• Risk Pricing – allocating capital to portfolios or contracts, and pricing to meet return on capital targets

• Business mix optimisation and performance measurement – for example, optimising the strategic business mix to maximise return on overall capital, subject to constraints.

A variety of capital allocation techniques exist that can help, although different capital allocation techniques will have different characteristics and give different allocations, therefore selecting an appropriate technique for the business problem is not always straightforward.

Several capital allocation techniques have already been included in Igloo Professional’s Library, and can be combined with ExtrEMB’s maximisation routines to help optimise business objectives.

As well as building models for capital setting, EMB has experience of using those capital models to allocate capital to help insurance company management quantify the impact of business decisions and optimise business strategy.