Capital Levels in the Insurance Industry
Urgent Assignment, Better finish it before 8;00
Like all businesses, insurance companies need to optimize capital, to produce the best returns on equity for their shareholders.
There is a tradeoff between having enough capital to be able to pay insurance claims, and not having too much capital.
To establish a target for the optimal amount of capital, the company needs to ensure it has the capital required to cover losses. On the other hand, the larger the amount of capital, the lower the rate of return to investors.
The greater the risk of the business, the greater the probability of having unexpected losses, and need to have the capital to absorb those losses.
Thus, insurance companies always want to consider the minimum capital they need to hold, but never be in a position of not having enough capital, and becoming insolvent.
Based on the above, write the body text for a memo to the CEO of The Twenties Property and Casualty Insurance, Inc. (minimum of 100 words, no maximum), setting forth all the relevant factors that must be considered in assessing the appropriate amount of capital it should have. The memo has to be based on risks, specifically as it relates to the property and casualty insurance business.
Specifically, what are the most important considerations in picking the optimum capital level? You do NOT need to prioritize these considerations, but you do need to explain why they are important.
You should focus on the trade-off between having enough capital, but not too much, as discussed above, specifically as it relates to the property and casualty insurance business.
The more relevant points you address, the better your grade. The better you identify which factors are common to all financial services institutions, and which are more unique to property and casualty insurance companies, the better your grade.