Economic Capital: The Insurance Company To Manage The New Framework

Economic Capital can be defined as sufficient surplus to cover potential losses, at a given risk tolerance level, over a specified time horizon. It is a totally new management principle for insurance industry. Insurance companies mainly focused on statutory reserves and local solvency requirement currently, which has been proved to be insufficient considering the future trend of across-operation between bank and insurance. After the emergence of the concept of economic capital and the successful experience of application in banking industry, insurance companies, insurance regulators and rating agencies have got the consensus on the economic capital applications in insurance company operations and risk management.There are three sections in this article, describing the definition of economic capital, the calculation and allocation method of economic capital and the actual practices of ING group. In another words, it answers following three questions: what is economic capital? How to calculate and allocate it? And how to apply in a practical business environment? Economic capital includes three fundamental elements: time horizon, acceptable risk tolerance and adverse event. Every insurance company can has its own understanding and definition of these three elements. The calculation and allocation of economic capital involves many aspects, including statistics, financial engineering and actuarial techniques. The specific calculation and allocation methods depend on the purpose and area of its application also depend on risk management ability and actuarial technical ability. As the one of the largest insurance group in the world, ING is leading the study and application of economic capital. They have developed a mature economic capital calculation method for various risks, particularly for market risk, insurance risk and credit risk mainly faced by insurance companies. The experience of economic concept from ING group is a good learning example for insurance industry of China. The study of economic capital is still in a developing stage. Actually it is very strange concept and practice for insurance companies in China. The purpose of the article is to introduce this outlying economic capital concept to china market based on current study material and industrial practices. The unique of this article is to integrate the study of economic capital with the actual industrial practices. I wish there is more persons that currently work in insurance industry or in the study area can get a more clear understanding of economic capital.Insurance industry is always balancing between risk and reward. Economic capital involves almost all risks faced by insurance companies, links with market value. So it definitely has strong life and has wide actual practice areas.