Life Insurance Company Capital Management
This domain tests how insurers source, allocate and deploy capital to support solvency, growth and shareholder return.
Capital concepts
Regulatory capital is driven by the 150% solvency requirement, while economic capital reflects the insurer's own risk measure, often a 99.5% confidence level. Capital sources include equity, retained earnings and subordinated debt. Capital is allocated by product, fund and risk, and performance is measured by return on capital, including RAROC. Reinsurance can substitute for capital, but only where the credit is recognised and the transfer is real. Dividend policy must preserve solvency and policyholder security.
Worked example
A product requires ₹500 crore of allocated capital and is expected to generate ₹60 crore of annual profit, giving RAROC of 12%. If the company's hurdle rate is 15%, the product destroys value on a risk-adjusted basis unless pricing, expenses or capital allocation improve. Raising the price may reduce sales; reducing capital through reinsurance may improve RAROC but changes risk retention.
Traps
Confusing regulatory capital with economic capital; allocating capital by premium volume alone; assuming reinsurance always releases capital; paying dividends before stress-testing solvency; ignoring capital tied up in new business.