In the third video of the Holistic Balance Sheet Management series, Andrew Cox, Capital Optimization, Guy Carpenter, and Niall Clifford, Financial Strategy Group, Mercer, give their overview on how increasing investment risk can introduce capital and earnings volatility.
Despite the resultant volatility, taking on additional market risk can be extremely capital efficient for insurance companies as return on incremental capital can be material if coupled with other capital management approaches. Insurers have to consider not only how much capital is necessary at a minimum but how much additional capital they need to hold in order to run their business according to compliance with regulatory requirements and to maintain a good rating. By working assets and liabilities together and not placing them in silos, companies may decide where they want to take the risk and on which side of the balance sheet to place it. The combination may have an impact on improving their overall position.
Managing Volatility by Breaking Down Silos
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