The power of capital modeling 

In today’s risk environment, which is arguably increasing in complexity, capital modeling is emerging as a strategic tool for captive insurers seeking to potentially optimize both underwriting and investment outcomes.

Capital modeling can provide a structured, quantitative approach to evaluating both underwriting and investment risks, and can offer greater clarity on how capital should be allocated and protected.

It can empower captives to quantify their exposure, assess potential downside scenarios, and align capital reserves with an agreed level of risk tolerance. By modeling risk interactions, such as those between cyber threats and operational volatility, captives can better understand how diversification reduces the total cost of risk. These insights can also support effective communication with internal stakeholders, regulators, and parent companies.

On the investment side, capital modeling is a tool that can help reveal how asset strategy influences capital requirements. It enables the potential for better integration of liquidity planning, return targets, and solvency needs. Captives potentially use this framework to optimize portfolios, assess opportunity costs, and develop forward-looking investment policies that reflect the evolving market environment.

It works by modelling all of the sources of risk for a captive insurer overlaying this against their balance sheet, risk tolerance, asset mix, time horizon, investment statement and reinsurance needs.

_{Source: Oliver and Mercer illustrative case study}

As interest rates continue to fluctuate, captives face growing pressure to enhance capital efficiency and manage long-term financial sustainability. Capital modeling can offer a robust foundation for making informed decisions across underwriting, investment, and capital management, helping turn captive insurance into a driver of enterprise value.

Capital Management

• Capital requirements
  How much capital do we truly need to protect against volatility?
• Capital calls or additional capital needed
  What is the likelihood of needing to draw capital from the captive insurer’s owners or parent company? Under what market conditions are we likely to need to make additional capital calls to fund claims or other financial obligations?
• Decision triggers
  What capital thresholds should prompt specific business actions, such as issuing a letter of credit or distributing dividends?

Risk strategy

• Risk communication
  What is our overall cost of risk across all lines? How can we effectively convey our changes in risk exposure to key stakeholders?
• Investment strategy impact
  Based on our outstanding liabilities, how do we optimize your investment strategy to maximize returns and minimize risk, while staying within organizational risk appetite?
• Captive strategy
  Do we have enough capital for growth and expansion? Would adding additional coverages reduce our overall total cost of risk.
• Reinsurance strategy
  How much reinsurance is appropriate for our enterprise needs?

Organizations looking to expand their use of captives or improve current operations may benefit from a deeper understanding of these dynamics.

To learn more about how capital modelling can help captives better understand their capital position and use that to inform better decisions, download our latest paper below.

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