Capital Modelling | Explaining the movement, not just the number

Jun 4

3 min read

Capital Modelling | The SCR bridge

In the previous two editions, we looked at capital from two angles.

First, we made the standard SCR component view more useful by showing it over time. Then we moved from risk modules to portfolio decisions by looking at capital intensity by segment.

Those views make movement and concentration visible. The next question is more direct:

what actually changed the capital requirement?

The Decision Question

What is driving the movement from last year's SCR to this year's SCR?

A multi-year SCR chart shows that capital has moved. But the movement can come from very different sources with different management implications.

Default Practice

Capital packs often show the prior-year SCR, the current-year SCR, and a short commentary paragraph.

That can be enough to reconcile the number but is rarely enough to explain the movement.

Where the Default Breaks Down

A single explanation can easily absorb too much of the change. “Capital increased because the book grew” may be true, but it can hide a deterioration in mix, a weaker diversification position, or a model parameter update that has changed the apparent risk.

The reverse is also possible. A flat SCR can look stable while growth has been offset by reinsurance, improved profitability, or a stronger diversification benefit. The total number can be calm even when the underlying capital story is not.

Suggested Improvement

Use a bridge from prior-year SCR to current-year SCR, with the movement split into a small number of decision-relevant drivers.

The most useful version separates movements management can act on from movements management must understand and explain. The exact ordering is less important than keeping the categories stable and clearly documented.

What this immediately reveals

The bridge changes the conversation from “the SCR increased by 11%” to “the SCR increased because growth and reserve uncertainty were partly offset by reinsurance and diversification.”

Whether the movement is mainly a scale effect, a risk-quality effect, or a methodology effect.
Whether capital is increasing in line with profitable growth or being consumed by less attractive business.
Whether reinsurance is reducing retained volatility or simply moving the explanation elsewhere.
Whether diversification is supporting the capital story more than last year.

Trade-offs & Risks

The bridge is only as credible as the attribution behind it.

Drivers can interact, so the categories will not always be perfectly independent.
The order of bridge items can affect interpretation, especially where mix, profitability, and diversification interact.
Model changes should be shown separately from business changes, even when they are implemented at the same valuation date.
Too many bridge items can make the chart look precise but less useful.
A reinsurance saving should not be read as a free reduction in risk without considering cost, credit risk, reinstatement terms, and availability.

For board packs, the bridge should focus on material movements. Small residual items can be grouped as “other” if they do not change the decision.

Decision Boundary

Use this when...	Don't use this when...
You want to explain why SCR moved, not only reconcile prior-year and current-year totals.	You only need a point-in-time SCR split by risk module.
You need to separate growth-driven movement from mix, profitability, reserve, reinsurance, model, or diversification effects.	The movement attribution is too weak or inconsistent to support driver-level commentary.
You want to distinguish business movements management can act on from methodology movements management must explain.	The main question is which segments consume capital relative to return; use the capital intensity map instead.
You need a board-level view of whether capital movement is expected, concerning, or action-triggering.	You need detailed model validation or full technical reconciliation rather than a decision view.

Once the movement is explained, the next question is whether the business is becoming more or less capital intensive over time.

In the next edition, we simplify the lens again and look at SCR per unit of premium: a practical way to test whether each unit of growth is arriving with more or less capital strain.