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Risk & Capital Management
At the 20th August 2014, the Club’s free reserves and hybrid capital remained stable at $529 million.
The Club’s target is to hold sufficient capital to remain in the AA range on the S&P capital model while also meeting all regulatory requirements, plus a suitable buffer.This buffer is designed to enable the Club to withstand a shock event yet still continue to hold capital sufficient to meet the standard regulatory requirement.
A comparison of the total cost of the 2011 policy year with that of the 2013 policy year demonstrates why it is necessary for the Club to hold an adequate buffer. The Club seeks to call sufficient premium to cover the cost of an “average” year based on the outputs of the Club’s internal model. The Club’s reinsurance programme provides some mitigation in the event of an expensive claims year. However, reinsurance cannot be a substitute for adequate capital in the long term.
The graph shows that the Club might expect a year as benign as the 2011 policy year only once in a 25 year period. A year of at least the expense of the 2013 policy year might be expected once in every five years. After six months’ development, the 2014policy year is developing in line with an average year such as the 2012 policy year.The probability and impact of an expensive year, such as the 2013 policy year,illustrates the need for a strong capital base.