In order to fully understand the key drivers of capital and the capital implications of business decision, the organisation should consider the following:
- Sensitivity analysis can help an organisation to understand the key drivers of capital requirements, for example high risk business classes or key model parameters, as part of ongoing measurement and monitoring of capital adequacy throughout the business cycle. Along with an understanding of expected returns across the business classes, this provides a sound basis to maximise the return on capital.
- Efficient allocation of capital would typically be done in the context of factors such as the risk profile of the organisation, regulatory requirements, rating agency expectations and the expectations of capital providers.
- The level of sophistication in modelling risk and capital has potential implications for returns.
