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💰 '''Allocated capital''' is the portion of an [[Definition:Insurance carrier | insurer's]] or [[Definition:Reinsurance | reinsurer's]] total available [[Definition:Capital | capital]] that has been assigned to a specific business unit, [[Definition:Line of business | line of business]], product, geographic segment, or risk portfolio for the purpose of measuring performance and managing [[Definition:Risk | risk]]. Unlike [[Definition:Regulatory capital | regulatory capital]] requirements — which are mandated externally by supervisory authorities — allocated capital is an internal management tool that reflects a company's own view of how much capital each segment consumes relative to the risk it carries. The practice is central to [[Definition:Economic capital | economic capital]] frameworks and [[Definition:Enterprise risk management (ERM) | enterprise risk management]], allowing senior leadership and boards to evaluate whether each part of the business is generating adequate [[Definition:Return on capital | returns]] for the risk assumed.

⚙️ Insurers typically allocate capital using risk-based methodologies that consider factors such as [[Definition:Underwriting risk | underwriting risk]], [[Definition:Reserve risk | reserve risk]], [[Definition:Market risk | market risk]], [[Definition:Credit risk | credit risk]], and [[Definition:Operational risk | operational risk]] associated with each segment. Techniques range from proportional allocation based on standalone [[Definition:Value at risk (VaR) | value at risk]] or [[Definition:Tail value at risk (TVaR) | tail value at risk]] measures, to more sophisticated diversification-aware approaches such as Euler allocation or Shapley value methods that account for the correlation benefits a segment provides to the overall portfolio. Under [[Definition:Solvency II | Solvency II]] in Europe, the [[Definition:Solvency capital requirement (SCR) | solvency capital requirement]] can be decomposed across risk modules, and many firms use this decomposition as a starting point for internal allocation. In the United States, the [[Definition:Risk-based capital (RBC) | risk-based capital]] framework provides a different but conceptually parallel structure. Japanese insurers under the [[Definition:Financial Services Agency (Japan) | FSA]] regime and Chinese insurers under [[Definition:China Risk Oriented Solvency System (C-ROSS) | C-ROSS]] similarly grapple with mapping aggregate capital requirements down to business-level decisions.

📊 Getting capital allocation right has direct strategic consequences. When a [[Definition:Line of business | line of business]] shows strong [[Definition:Return on allocated capital (ROAC) | return on allocated capital]], it signals that the segment is creating value and may warrant expansion; when returns fall below the insurer's [[Definition:Cost of capital | cost of capital]], it raises questions about repricing, restructuring, or exit. [[Definition:Lloyd's | Lloyd's]] employs a form of capital allocation through its oversight of individual [[Definition:Lloyd's syndicate | syndicates]], setting [[Definition:Economic capital assessment (ECA) | capital requirements]] by syndicate based on their specific risk profiles. In [[Definition:Reinsurance | reinsurance]] groups such as [[Definition:Swiss Re | Swiss Re]] and [[Definition:Munich Re | Munich Re]], allocated capital analysis informs decisions about how much capacity to deploy to property catastrophe versus casualty lines in any given year. The discipline also underpins conversations with [[Definition:Rating agency | rating agencies]], which increasingly expect insurers to demonstrate that capital allocation processes are rigorous and aligned with risk appetite — making it not merely an internal exercise but one with material implications for an insurer's external credibility and market standing.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Economic capital]]
* [[Definition:Return on allocated capital (ROAC)]]
* [[Definition:Solvency capital requirement (SCR)]]
* [[Definition:Risk-based capital (RBC)]]
* [[Definition:Enterprise risk management (ERM)]]
* [[Definition:Cost of capital]]
{{Div col end}}

Definition:Allocated capital - Revision history

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