-
Overall Strategic Direction
- Finance new business (as new business costs may exceed revenue) i.e. to meet acquisition expenses and pay commission
- For investment projects (e.g. launching new products, new IT systems, merger/acquisition)
-
Smoothing Profits
- Smooth results, smooth bonus distributions on with-profit business
- To pay claims/expenses in excess of premiums i.e. working capital
- Maintain a cushion against adverse future experience
- Meet claims as they fall due. Particularly since the timing of claim payments is highly uncertain
- Meet the financial consequences of unexpected eventss e.g. credit crunch or stock market volatility
-
New Business
- Finance new business strain
-
Providing guarantees
- Where guarantees and options are provided additional capital may be needed
-
Investment strategy
- Meet mismatching costs. These may arise due to the investment strategy that the company adopts.
-
Attracting business
- To attract new business by demonstrating the financial strength of the new company
- capital can be used to distribute more bonus, and then increase new business volume
- Capital can be put into marketing, commission, therefore increase new business
- Capital can be used to finance options and guarantees
-
Minimize Regulatory Attention
- Required by the regulators. Capital is required to ensure an insurance company has sufficient solvency and cashflow to meet its liabilities in all reasonably foreseeable circumstances.
- Demonstrate solvency
- A sufficient level of capital will minimize the risk that the regulator will put restrictions on the firm's activities.