July 29th, 2009

Five Ways to Make Your Capital More Productive

Posted at 1:01 AM ET

Susan Witcraft, Managing Director, Financial Intelligence Team

The financial catastrophe may be almost a year behind us, but we’re still dealing with the effects. Capital remains constrained, and it will be a while before balance sheets return to early 2008 levels. (Re)insurers have had to learn to do more with less — deploying limited capital in a way that maximizes earnings and reaches challenging return on equity (ROE) targets. With MetaRisk®, Guy Carpenter’s economic capital model, you can delve into the scenarios that could mean the difference between capital productivity and missed opportunity.

1. Set clear financial objectives: targets should be attainable but challenging. Every decision should contribute directly to achieving these goals.

2. Align your risk appetite, profile, and tolerance with your goals: the assumption of risk should be consistent with your stated financial objectives. If you have lofty ambitions but a low tolerance for risk, for example, at least one side of the equation has to change.

3. Understand the threats to your capital: identify the risks that you face — including those that may be hidden. Model the scenarios to see the potential outcomes — positive and negative.

4. Evaluate your alternatives: using model output and risk manager judgment, compare strategies and choose the best option based on your financial objectives. Take informed action.

5. Measure the results: revisit this process regularly. Market conditions change … and so does your portfolio.

Learn more about MetaRisk >>

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