Economic Capital
EconomicThis document has been made available on www.actuaries.org.uk with the permission of the Society of Actuaries, Schaumburg, Illinois. Copyright 2008.
Specialty Guide on Economic Capital
Version 1.5 March 2004
Specialty Guide on Economic Capital
Section
I. II.
Page
FOREWORD...................................................................................................................1 INTRODUCTION AND OVERVIEW ...............................................................................2
III. EXECUTIVE SUMMARY ................................................................................................3 IV. HOW DO WE DEFINE ECONOMIC CAPITAL? ............................................................5 V. USES OF ECONOMIC CAPITAL.................................................................................10
VI. TIE-IN OF ECONOMIC CAPITAL TO REGULATORY/RATING AGENCY CAPITAL 21 VII. CURRENT APPROACHES TO CALCULATING ECONOMIC CAPITAL....................23 VIII. CURRENT APPROACHES TO ALLOCATION OF ECONOMIC CAPITAL ................37 APPENDICES Appendix 1: A Theoretical Method of Calculating EC Appendix 2: Industry Survey on EC Appendix 3: Review of Literature
Specialty Guide on Economic Capital
1
I.
Foreword
This Specialty Guide on Economic Capital is a work in progress. It was made available in June of 2003 by members of the Economic Capital (EC) Subgroup of the Society of Actuaries Risk Management Task Force (RMTF) as an indication of the Subgroup’s progress since its formation in the Spring of 2002, and to stimulate wider discussion of the issues raised in the report. Acknowledgments go to the following members of the EC subgroup for their active contributions in completing this report: Jenny Bowen Kitty Ching Nathan Greenlee Gary Hatfield David Ingram Patricia Matson Hubert Mueller Terry Owens Kamran Quavi Kevin Reimer Brett Roush Jose Siberon Erik Von Schilling Ali Zaker-Shahrak
This update reflects a
Specialty Guide on Economic Capital
Version 1.5 March 2004
Specialty Guide on Economic Capital
Section
I. II.
Page
FOREWORD...................................................................................................................1 INTRODUCTION AND OVERVIEW ...............................................................................2
III. EXECUTIVE SUMMARY ................................................................................................3 IV. HOW DO WE DEFINE ECONOMIC CAPITAL? ............................................................5 V. USES OF ECONOMIC CAPITAL.................................................................................10
VI. TIE-IN OF ECONOMIC CAPITAL TO REGULATORY/RATING AGENCY CAPITAL 21 VII. CURRENT APPROACHES TO CALCULATING ECONOMIC CAPITAL....................23 VIII. CURRENT APPROACHES TO ALLOCATION OF ECONOMIC CAPITAL ................37 APPENDICES Appendix 1: A Theoretical Method of Calculating EC Appendix 2: Industry Survey on EC Appendix 3: Review of Literature
Specialty Guide on Economic Capital
1
I.
Foreword
This Specialty Guide on Economic Capital is a work in progress. It was made available in June of 2003 by members of the Economic Capital (EC) Subgroup of the Society of Actuaries Risk Management Task Force (RMTF) as an indication of the Subgroup’s progress since its formation in the Spring of 2002, and to stimulate wider discussion of the issues raised in the report. Acknowledgments go to the following members of the EC subgroup for their active contributions in completing this report: Jenny Bowen Kitty Ching Nathan Greenlee Gary Hatfield David Ingram Patricia Matson Hubert Mueller Terry Owens Kamran Quavi Kevin Reimer Brett Roush Jose Siberon Erik Von Schilling Ali Zaker-Shahrak
This update reflects a