SA3- Incorporation of cost of capital in business planning (Method…
Shareholders care about how well the insurer is using the capital they have put up. A well capitalised insurer may be stable but may not be making much money given the capital it has.
Insurer needs to hold enough capital to be secure but not so much that is uses capital inefficiently. This depends on ability to use risk based metrics e.g. return on capital values in underwriting and strategic decision making
To do this need to allocate overall capital requirement to component parts of the business based on contribution to overall risk profile. Can then develop areas where capital can be deployed efficiently.