[研究生入学考试]Pitfalls of Capital Allocation.ppt

Pitfalls of Capital Allocation Donald Mango, FCAS, MAAA American Re-Insurance CAS 2001 Spring Meeting “The Happy Sholom” Step One: A Single Name We allocate CAPITAL And we have Premium-to-SURPLUS And we talk about Return on EQUITY We need ONE NAME Step One: A Single Name SQUAPITAL SURQUITY EQUITUS SQUIRTAL SCRAPITAL Should We Allocate Capital? Yes No Maybe Splunge See Monty Python It isn’t yes, and it isn’t no, but I’m not being indecisive. Look At All the Benefits Risk-adjusted performance measurements for products Strategic insights into the efficiency of our capital management Determine which activities create shareholder value and which destroy it SOUNDS GOOD !! What Total Amount Should We Use? Statutory, Economic, GAAP Equity, RBC, BCAR, SP? Static or Dynamic? Top-Down (true allocation) or Bottom-Up (rolled up from “atomic” level)? Tied to financials or purely theoretical? Do We Want More or Less? The Home Office allocates capital to our underwriting division Do we want MORE or LESS? Depends on what it represents Underwriting capacity, Vote of Confidence ? MORE Return burden (Subject to a “Hurdle Rate”) ? LESS MORE on this later … What About the Bathwater? Everybody likes to assume a single policy, with dedicated assets, and capital that gets released over time in a nice non-increasing manner, … Then a single IRR falls out !!! :-) Forget the actual reserves, current asset portfolio, runoff operations, AE, steady state, … They just cloud the picture. What About the Bathwater? But for a steady-state, multi-line carrier with substantial casualty reserves, those reserves can carry the majority of the future calendar year risk Show of hands - who works for a company that has had material adverse development on prior accident years in the last two calendar years? What About the Bathwater? What should we do with that reserve (or asset or AE or runoff) risk? Ignore it ? Incomplete, misleading overall picture; throwing away the majority of the risk Allocate to it