The net impact of prudent capital modeling and management — in regards to both rating agency evaluation and regulatory compliance — is a competitive advantage. (Re)insurers that accept the outcomes of rating agency or standard regulatory calculations may wind up either with gaps in cover (where de facto approaches are insufficient to address a carrier’s risks) or unproductive capital (where the norm requires over-allocation). The use of an internal capital model, on the other hand, allows a carrier to optimize its analysis to its own situation, with more accurate results and more informed decision-making.
Whether compliance, rating agency management or capital optimization drives the specific advantages realized, (re)insurers need to understand that any edge is inherently short-lived. The advantages enjoyed by early adopters eventually draw broader constituencies, ultimately becoming tomorrow’s best practices. As this evolution occurs, what was once an edge turns into the price of admission to the market. The continued proliferation of ERM, along with improvements to capital modeling technology, are likely to change how (re)insurers approach the challenges of risk and capital management. As this happens, the playing field will begin to level, and carriers will need ERM frameworks and robust capital models merely to stay competitive.
What counts as optimization today will be an operating standard in the future, and risk-bearers will have to find new ways to gain an edge over the competition. Fortunately, in an ever-changing market, there are always new opportunities emerging. As long as there is innovation, there will be market leaders.
This article was originally published in Contingencies.
This article is intended for general information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such. Statements concerning accounting, legal, regulatory or tax matters should be understood to be general observations based solely on the author’s experience in the reinsurance industry, and may not be relied upon as accounting, legal, regulatory or tax advice which he is not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.