Under the FSA (and also current proposals for Solvency II) an insurer’s or reinsurer’s capital requirements are determined by the total risk inherent in the business. There are five main categories: underwriting risk, credit risk, market risk, operational risk and liquidity risk.
Quite apart from regulatory considerations, it is best practice to understand these risks as doing so enables you to allocate capital most effectively. Indeed, as illustrated in the exercise outlined in the Portfolio Optimization section, it can enable you to identify better ways of exploiting your capital without leaving the business unduly exposed.
EMB have considerable expertise and experience in helping insurers and reinsurers to understand their capital requirements and in using this information to devise corporate strategies. See also Financial Modeling.
