Capital strength provides the foundation on which the Club will achieve its goal of maintaining long term financial strength.
The stability of underwriting result over the last five years, coupled with robust investment return, has enabled the Club to build a strong capital base. The Club’s free reserves have reached $449 million with $99 million of hybrid capital taking the overall free reserves and hybrid capital to $548 million. Capital strength provides the foundation on which the Club will achieve its goal of maintaining long term financial strength.
The Club manages risk within its appetite through mitigation techniques such as reinsurance.
The Club’s target is to hold sufficient capital to cover the rating agency and regulatory requirement, plus an appropriate buffer. This buffer is designed to ensure that the Club could withstand the impact of a very adverse year, yet continue to hold enough capital to meet the regulatory requirement.
Maintenance of capital
The Club aims to preserve capital through robust risk management processes including reinsurance purchase and other risk mitigating techniques. The Club’s internal model enables the capital impact of these techniques to be identified in advance so allowing the Club to make informed decisions on their use. Risk management techniques can reduce but not remove volatility.
The graph below is generated by the Club’s internal model and shows the probability of various claims outcomes for the 2015 policy year. Analysis is completed each year and assists the Board when setting the premium requirement. The Club seeks to meet the mean claims outcome through annual premium, capital is required to meet fluctuations outside of the mean level. The 2012 and 2014 policy years were close to mean, with the 2013 policy year more expensive.
The financial strength of the Club has enabled it to absorb the more expensive 2013 year without diluting its capital base.
The Club has determined the immediate actions that it would take should its available capital fall below the target level. In addition, to avoid holding excessive amounts of capital, the Club has set an upper limit to the capital that it should hold, given the risks it faces and its risk appetite. Should the available capital increase above the upper limit,the Club would also take appropriate actions to address this; such actions may include the return of capital to Members.