To improve returns to shareholders, chief executives of insurance companies around the world use a variety of techniques, including mergers and acquisitions, programs for improving the performance of core businesses, and schemes to promote investor relations. Although most insurers are massively overcapitalized, the repertoire doesn’t include capital management, which senior executives appear to regard as largely a matter for actuaries and accountants.

This state of mind has a number of causes. In the first place, the actuarial and financial sides of insurance companies don’t communicate well. Moreover, formidable analytic and computational difficulties confront any company that attempts to determine not only how much capital is required to cover the risk from its different business lines but also the actual return on capital. Regulation too has played a part: until recently, even if companies tried to manage their businesses and capital aggressively, they were frustrated by the rules governing insurance markets, particularly in Europe.

But deregulation, threats of acquisition, tougher competition, and eroding margins make it increasingly important to give shareholders competitive returns—and also supply the pressure that could transform capital management into a powerful tool for creating value. Advances in analytics and computing power address the complexities of the...