Study On The Economic Capital Of Extreme Risks Of Insurance Company

While there are many forms of capital such as capital required by regulatory authorities and capital required by rating agencies, this dissertation focuses on the form of capital, namely economic capital, that provides a measure of amount that the insurance company should have at the minimum, to be able to withstand both expected and unexpected future losses. From the insurer’s perspective, the purpose of economic capital is to provide a financial cushion for adverse situations when its insurance losses exceed or asset returns fall below the levels expected. This cushion further enhances the insurer’s ability to continue paying claims and in most instances, to continue writing new business even under unfavorable financial circumstance. This is no denying therefor that the management of capital forms an integral part of any insurance company’s risk management. Economic capital is increasingly becoming a significant area of interest for the internal reporting and managers of insurance companies.This dissertation first describes the definition of economic capital given by the domestic and foreign scholars and regulatory agencies, and compares the difference between economic capital and accounting capital and regulatory capital. Also the relationship between economic capital and solvency regulation is analyzed. Second, the article focuses on the measurement of economic capital used by several domestic and foreign financial institutions, including:Credit Suisse first Boston, Internationale Nederlanden Group, Industrial and Commercial Bank of China and China Construction Bank. Finally, the article assumes that the insurance company’s loss rate is equal to the negative of previous year ROE and economic capital demanded of the extreme risk of the insurance companies in China is estimated.The main innovation of this dissertation is:economic capital models and measurement are summarized and the study of the economic capital measurement model is expanded. According to the actual situation of insurance companies in China, based on the TailVaR method, this paper measures the economic capital demanded for the extreme risk of insurance companies. It will be helpful for the application of economic capital in the ERM of insurance companies in China.