Risk Capital Management

This is as an alert for insurance company.
Capital is very important part of insurance industry as capital is on risk to the the loss and claim. But, did you aware that you cannot optimalize your capital in everyway?
Capital as shown in the Balance Sheet is consist of 2 parts i.e:
1. Liquid Capital (i.e deposit; cash etc)
2. Unliquid Capital (i.e asset; receivable etc)
So what would you do when your company has to pay claim, but you do not spred or risk your capital?
Therefore, to find your REAL Capital you can optimize freely, you have to risk your capital into the following parameter:
A. Risk Capital to Core Business
This is the major part of the insurance company. Payment of claim is taken from the sources of
a. Capital, whether liquid or unliquid. Liquid capital is prepared for the small claims or claim under net retention. But for the huge claims, payment of claim enable to use their unliquid asset or bank facility or other instruements.
b. Reinsurance, as you may call it as a reinsurance recovery. Claim payment taken from other company by reinsurance mechanism.
No matter the sources, it will still expose your capital. For the small amount of claim, it is very dangerous part if you have a lot of claim which is fall under your net-net retention, it means that you will unable to optimalize your capital for investment because your capital turnover will be high. Another problem is, what happend if your have very frequent of small claims fall under your net-net retention, is you have satisfied capital? or you have no sufficient capital finance it? it may exposure to your company to bancruptcy.
Eventhough you have reinsurance programs, your capital still being exposed by the following:
1. You must pay the claim first before you can take recovery from reinsurance. Therefore you will loss opportunity of investment because of time lack between claim paid by using your capital and recovery.
2. You will cannot recovery paid claim to your reinsurer. Means the capital you had used is purely funded by your capital. In other words, you can't use your THIRD CAPITAL
By put the risk in your capital, you will able to anticipate those conditions.
B. Risk Capital to Investment
The power of your Balance Sheet is also rely on your investment. Please back to 2008 when the Global Financial Crisis is Coming, how many companies falls down. If your investment instrument dominantly in the stock market, then you will exposed to the market weakening. Just simple simulation like in 2008 global financial crisis. When your stock in the market is say 1000 lots and price per lot is say USD. 1,000 then your Balance Sheet put USD. 1,000,000 investment as capital (USD. 10*100*1,000). What happend then if your stock priced as 1 sheet for USD. 2.5, it will weakening the power of your Balance Sheet for 75%. If your Insurance Company or Bank Company, your Risk Based Capital (RBC) or Credit Adequacy Ratio (CAR) will falls down and make your company falls to unliquid company. Furthermore, you have to put this risk in your Capital management to anticipate this condition to prevent your company in the red number.
C. Risk Capital to Human Resource
This is also the most important part of your capital management. The risks coming from the following part i.e:
1. Your HR is uncountable in your asset type. If your company has high employee turnover you will need more fund to create other employee as good as or much better than before. Cost of it will be taken from your capital fund.
2. This also very urgent it is fidelity. Your business operation will also being exposed from your employee i.e in insurance industry like your employee do not deposit the premium but you have to pay the claim.

D. Risk Capital to Information & Communication Technology
This is use to your ICT development where your must create reserve from your capital for the ICT improvement. ICT is expensive and to fund it development will be takef from your capital. This reserve is absolute but very rare company want to do it because mostly the company would to improve their ICT if the have sufficient fund taken from their profit but do not reserve it.
E. Risk Capital to Legal
Company must aware that this business is very dynamic and regulation may change at anytime to meet market requirement. It will exposed to the company especially to your Balance Sheet. Simple example in Indonesia Insurance Industry for the changes of :
1.  Minimum Paid Up Capital, this is urgent issue to against global market where the player must have sufficient capital to protect their insureds. Therefore, capital must be reserved to anticipate any changes as required by the regulator, therefore if any changes of government requirement then the company will easily to anticipate.
2. Sharia Reporting Basis, you may find it in the newest accounting standard report that the admitted company asset is for UJROH only and Tabarru find is not being recognize as company's Balance Sheet.

F. Risk Capital to Environment 
Insurance company may also concern in this aspect. Company may not put their capital as their own purpose but also must be used for the Corporate Social Responsibility. Beside that, it will also affect to the insurance business for the class of business of Liability. It able increase insurer exposure for the Insured liability to environment that must be recovered by Insured.
Hope this will develop your awareness of your capital.
Thank you.

Fakih Wahyudi