Determining Optimal Capital for Insurance Companies, Using Internal Modeling for Solvency Margin Ratio and Cost-Benefit Method

The main purpose of this paper is to determine the amount of capital that can meet the conflicting expectations of both shareholders and the supervisor. In this regard, by using loss ratio data of four insurance companies (A, B, C and D) in period 1370-1396, supervisory capital requirement has calculated in the form of internal modeling, based on capital requirement calculation directive and Value at Risk method (parametric variance-covariance method). Then, based on cost of capital method and risk margin and cost-benefit approaches, optimal capital for insurance companies determined from point of view of both Central Insurance of Islamic Republic of Iran and the shareholders of insurance companies point of view. The findings indicate that the optimal available capital of insurance companies are approximately equal to 130,069, 35,478, 20,897 and 13,177 bilion IRR, respectively. Therefore, minimal and balancing solvency margin ratios were also estimated approximately 164.4%, 164.9%, 241.2% and 120.9% respectively, to meet expectations of both shareholders (capital return) and buyers of shares of these companies (cost of required capital) and Central Insurance of Islamic Republicof Iran (required capital), as the supervisor.