Risk Management Solutions (RMS) and ERisk, a provider of strategic solutions for enterprise risk management and economic capital allocation, released results of a jointly sponsored evaluation of the capital adequacy and risk-adjusted profitability of various segments within the property/casualty insurance marketplace.
According to Hemant Shah, president and co-founder of RMS, the study is the first to examine the risk-adjusted profitability and capital adequacy of the p/c industry, segmented into industry peer groups. The information will allow insurance executives to explore industry capital requirements based on measuring all risks, including asset risk, interest rate risk, catastrophe risk, non-catastrophe insurance risk, and operating risk.
The industry study utilizes RMS and ERisk’s Property & Casualty Risk-Adjusted Return on Capital framework to provide the basis for evaluating risk, capital, and shareholder value across all risk types and activities. Information within the study was drawn from an analysis of more than 1,100 p/cinsurance companies. The data was obtained from publicly available annual statements and reports.
Catastrophe risk data was collected from proprietary RMS databases and models while data on stock index returns and interest rates was gathered from industry standard data sources. Other data were provided from RMS and ERisk benchmarks.
Among the major findings were the following facts:
— The industry as a whole is overcapitalized by 20-30 percent.
— The industry segment earning the greatest RAROC is stock companies specializing in personal lines and using agents as a distribution channel, at over 15 percent.
— The average RAROC for the p/cindustry is 10 percent.
— Risk-Adjusted Return on Capital for the p/c industry indicates that average returns are low and skewed in favor of non-catastrophe lines of business.
— The attribution of economic capital by risk type varies dramatically by industry segment.
— The diversification benefit across risk pillars reduces the economic capital required for the industry by 32 percent.
Detailed information regarding the risk-based economics of various business lines within the U.S. p/c sector is available via the RMS and ERisk websites, www.rms.com and www.erisk.com.
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