The Application Of Economic Capital

The word economy has been hit by the financial crisis, but also the global insurance industryseems to be a stage of the development of the downturn. Foreign insurance companies have been defensiveor even managed an exit from Chinese market, meanwhile, the development of Chinese insurancecompanies have also entered into a period of slow growth rate. Under express financial crisis, for Chineseinsurance companies, it’s not only a challenge but also an opportunity. Whatever the regulator or theinsurance company itself are looking for how it can enhance the ability to resisting risks and how it cancreate more value under this circumstances.Economic capital is an internal management tool to combine the risk and capital management. Therisks can be quantitatively described by economic capital, so this framework can consummate thecomprehensive risk management. Economic capital is also a value indicator in order to evaluate the realperformance of product line and business unit. Through almost40years, the framework of economiccapital has been fully practiced in advanced commercial banks at home and abroad. Foreign advancedinsurance company has also found the advantage of the economic capital. So it has been introduced intoinsurance industry and introduced into China.Economic capital management involves the knowledge of finance、insurance、risk management andfinancial management, so it is a complex approach. It need the support of management concepts、mathematics models、historical database、information system and theoretical research. In addition to this,the concept of economic capital has been introduced to China for only8years. So in our country thenumber of theories regarding economic capital is few and we do not have any practice experience. Butlucky, more and more insurers pay attention to researching on it. As it is said by Wei Yingning onInternational Actuarial Seminar that economic capital is a new concept of risk management in insurancecompany. It is believed that economic capital management will be practiced in Chinese insurance company.Based on many researches at present of economic capital of academic, firstly, this papersummarizes the development history and practice of the economic capital management in commercial banks. This process makes better measurement of economic capital, so it is layingthe groundwork for an application in another industry. Secondly, this paper pays attention tothe combination of induction and deduction, and analyses the possibility of the practice ofeconomic capital based on the business and the risk in insurance industry. Thirdly, through acase of ING Insurance, this paper shows the practice of economic capital management andsome key approach. Finally, this paper designs a conceptual framework which involves thekey factors of economic capital management, according to the environment in our country.