Capital management

The Group steering function of capital management

  • creates transparency as to the actually available capital,
  • specifies the required risk capital and coordinates the determination thereof,
  • optimizes the capital structure, implements financing measures and supports all structural changes that have implications for the required capital.

Capital management is based on a process for the optimization of capital steering and capital deployment within the Group that is structured through clear guidelines and workflows.

An important subfield of capital management is identifying capital that exceeds the required risk capital on our defined level of certainty of a 99.5 percent Value at Risk or – in the opposite case – falls short of this level. This defines the estimated maximum loss that with a specified probability will not be exceeded within a specified holding period. If such over- or undercapitalization exists, the next step is to rectify or at least alleviate it by taking appropriate corrective actions. In the case of significant overcapitalization at the company level, for example, capital management measures may be geared to systematically reducing free excess capital.

In this context we consider it our stated aim to achieve the most efficient possible utilization of our capital while at the same time ensuring appropriate capital adequacy and making allowance for the effects of diversification. We view the optimization of our capital and financing structure as a further crucial aspect of capital management. Our goal in this regard is to arrive at an optimal cost of capital and the best possible capital allocation.

In the management system of the Talanx Group we differentiate between three fundamental capital concepts, namely “Company’s Capital”, “Risk-Based Capital” and “Excess Capital”.

In the context of our value-based management approach, the company’s capital serves as a basis for determining the cost of capital and the excess return above and beyond the cost of capital (cf. also under “xRoCC”). It represents the total capital available in a unit (company or segment/division), and is composed of the IFRS shareholders’ equity and the so-called soft capital. For us, soft capital includes, for example, the loss reserve discount, a level of overreserving in property/casualty insurance that goes beyond best estimate reserving and the non-capitalized value of in-force business in life insurance and life/health reinsurance.

Risk-based capital is the amount of capital necessary for the conduct of insurance business in order to ensure that the probability of capital erosion is kept below 0.5% (cf. the risk report). The comparison with the available (company’s) capital indicates over- or undercapitalization and capital adequacy.

Excess capital is the residual of the company’s capital and risk-based capital; it constitutes the capital that is not at risk.