Donald Mango, Head of Global Advisory
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Capital allocation decisions are among the most important decisions made by company management. Through our own research and thought leadership and our observance of best practices at clients around the world, Guy Carpenter’s Enterprise Risk Management Advisory practice has compiled a set of leading practices around capital allocation for (re)insurers.

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Susan Witcraft, Managing Director, Financial Intelligence Team, Instrat
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Co-xTVaR has almost the opposite advantages and disadvantages of standard deviation. It is calculated as the amount by which each risk is worse than its expectation in those situations in which the totality of risks being modeled exceeds its expectation. Co-xTVaR can be viewed as the amount by which a segment is “over budget” in those scenarios in which the company as a whole is “over budget.” In other words, co-xTVaR looks at the average amount by which each segment exceeds its mean in the scenarios in which the company result exceeds some threshold.

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Susan Witcraft, Managing Director, in Guy Carpenter’s Instrat® Unit and leader of the Financial Intelligence Team, discusses capital allocation in this new GC Capital Ideas podcast. Click the audio player below to listen to the interview, or download the interview in a file that will work with your iPod.

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Susan Witcraft, Managing Director, Financial Intelligence Team, Instrat
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Capital allocation is a discipline without consensus. Some believe in sticking strictly to allocating the cost of capital, while others believe in allocating capital itself. Meanwhile, the methods for allocating capital (and its attendant costs) vary, ranging from the simplest — standard deviation — through the increasingly complex covariance, co-xTVaR and shared assets approaches. The exercise becomes one of managing tradeoffs, as risk managers balance the simplicity of effort against the potential benefits of capital optimization.

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Donald Mango, Chief Actuary, and Susan Witcraft, Managing Director
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In choosing a capital allocation method, firms must balance the sophistication of the method with calculation time and resource commitment. One approach, co-xTVaR, strikes a balance between theoretical soundness and efficiency. In a capital-constrained environment, using co-xTVaR to allocate the cost of capital can provide a clear competitive advantage.

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Susan Witcraft, Managing Director
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The co-TVaR report in MetaRisk gives analysts easy access to valuable information to illuminate the Enterprise Risk Management (ERM) and capital implications of reinsurance. Using co-TVaR for risk decomposition, one can develop a fuller view of the factors that contribute to company risk, ultimately delivering a more compelling case for risk-related decision-making.

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