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Capital strength provides the foundation on which the Club will achieve its goal of maintaining long term financial strength.
Capital strength and appetite for risk
The Club’s free reserves stand at $448 million with $99 million of hybrid capital taking the overall free reserves and hybrid capital to $547 million.
Six successive years of balanced underwriting has underpinned the Club’s capital strength. This has enabled the Club to maintain or increase capital strength even in years where claims cost has been elevated, such as 2013, or investment markets have been unfavourable, such as last year.
The Club seeks to manage capital by utilising risk management techniques including the purchase of reinsurance. The Club determines and monitors the effectiveness of these techniques through application of its approved internal model.
The Club’s target is to hold sufficient capital to cover regulatory and rating agency requirements, plus an appropriate buffer. This buffer is designed to enable the Club to continue to meet its capital targets in the event of a very adverse year.
The Club’s capital meets the AAA requirements of the S&P model when Hybrid capital is included and AA based on free reserves alone.
Although risk management techniques can be used to mitigate volatility, it is not possible to remove it entirely. The graph below shows the probability of various claims outcomes for the 2016 policy year. This analysis assists the Board when setting the premium required to meet the mean claims outcome of the forthcoming year. The Club uses its retained capital to meet the cost of claims above the mean level.