Question on Capital Strain?

thesuperactuarythesuperactuary
in MSA.Ratios

What is the concept of capital strain?

Let's say for the ratio: chg(NWP) % (% change in NWP): growth measure - high value may indicate capital strain

Doesn't it imply we have more NWP in the recent year, compared to prior year => more money for shareholders?

Comments

  • Staff-T1Staff-T1
    edited January 2022

    Hi,

    Yes, we have more money in the bank but that is not the only consideration when writing policies. Remember, we are not only concerned about expected losses but also capital required. Think back to the MCT and try to visualize how a large change in NWP will affect your MCT capital required and consequently your MCT ratio. You will need more capital to account for the growth in NWP, premium liabilities and claim liabilities. If you do not have enough capital to support your business, you will not be able to support more growth despite having more cash in the bank from premiums so to speak and you will eventually fall below the 150% threshold if you are writing as many policies as possible.

  • thesuperactuarythesuperactuary

    That makes a lot of sense. Thank you!

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