Insurers are continuously seeking better ways to measure and allocate capital to maximize returns while maintaining financial rating stability. Aon Benfield performs a number of capital analyses and can help determine a client’s capital needs given their rating target. To further enhance our capabilities, the Financial Consulting team has developed a customized modeling approach to effectively allocate capital by line of business based on Best’s Capital Adequacy Ratio (BCAR) that also incorporates the BCAR stress test.

Aon Benfield’s OptiCap model determines how much capital is required to support a client’s specific line of business from a BCAR perspective. Results can be used to measure or gauge profitability, align compensation strategies relative to corporate risk appetite, diversification, and mitigation strategies such as use of reinsurance, and other hedging activities.

Aon Benfield’s OptiCap Modeling Advantage 

• Consistent and Transparent Allocation Algorithm. The standardized nature of rating agency capital models means that there will be a high degree of consistency in the allocation algorithm and results interpretation from year to year.
• Meaningful Results. The modeled results are important because many companies are heavily influenced by rating agencies.
• Low Resource Commitment. The capital model approach requires a relatively low resource commitment, and data requirements are manageable because they are based largely on reported financial results.

Capital allocation models are not a one-size-fits-all approach and can provide management with a framework to measure performance relative to the underlying risk of the business. Please refer to Aon Benfield’s paper, Capital Allocation via a Rating Agency Capital Model, for a more detailed description on the advantages of using this approach to ascertain capital requirements by line of business.