Is all Capital Equal?

It is my view that whilst seemingly all Capital is equal, some Capital is more equal than others.

What do I mean?

The foundation of an insurance entity seems to follow very predictable routes: create a new company, do the rounds of various Private Equity funding or similar, obtain a huge amount of Capital, start underwriting or broking or whatever it is the company proposes to do. Sounds straight forward enough doesn’t it?   But what does this actually mean?

´Capital is not the fund of first resort, it is very much the fund of last resort.´

Capital is very much a double edged sword, it is not freely given and can be taken away if carefully laid plans are not adhered to. Capital is not the fund of first resort, it is very much the fund of last resort. Capital is not given in the expectation that it will be used, very much the opposite, if Capital is being ‘used’ to fund claims then the wheels have long since come off and the company is headed for the dogs.

So what is the value of Capital? Given that it is not invested in the expectation of loss, what is the purpose of Capital for the company into which the money is invested? The value is partly regulatory and partly Credit Rating. The Regulator requires a certain level of unencumbered Capital to be available in order to obtain the required Insurance license and the Credit Rating Company’s Financial Rating is based upon capital to exposure.

´Capital becomes a straight jacket, a well fitting, velvet lined straight jacket but a straight jacket nevertheless.´

It has always amused me how vital the Capital is to Credit Rating Companies and to Regulators given that it should never be used. Of course, I understand that it is there to provide Policy Holder Protection but if history teaches us anything it is that by the time Capital is being deployed to pay claims the game is often well and truly up.

Capital invested is just that – an investment, a return is expected and if it is not delivered then Capital will be deployed elsewhere. Capital becomes a straight jacket, a well fitting, velvet lined straight jacket but a straight jacket nevertheless. The insurer becomes the servant of the investor, the investor needs his investment protected at all costs and the return on equity becomes imperative. All insurance coverages are slanted toward return and avoidance of loss activity, little wonder that we see an inexorable slide toward ever higher deductibles and more and more exclusions.

But I suggested that not all Capital is equal, why? Capital created organically is, in this writer's opinion, far superior than Capital ‘given’ with strings attached. At Hartwell we generate organic capital which is another way of saying we retain profits and invest them into the company. It makes for a slow and very careful start but the capital generated thereby is free of strings. It gives us the ability to be more flexible and open to new ideas. It permits us to write business that we see fit as it presents itself and perhaps most importantly, it enables us not to write business if we don’t want it because there is no imperative to provide a ROI. We are, if you like, the Master of our own Destiny.

´Organic capital comes with no strings, no expectation and allows the creator of such Capital freedom of action.´

So not all Capital is created equal. To some degree outside Capital is illusory, it is there for licensing and for rating purposes, but that is the expected extent of its value. Organic capital comes with no strings, no expectation and allows the creator of such Capital freedom of action. The next time your insurer seeks to impress you with capital figures, just remember that some capital is more equal than others.

Roland Horton

Dallas, May 2026