Actuarial Notes

Economic Capital Modeling: Practical Considerations, 2024 update

By Anthony Dardis, Jorren Jacobs, Bryan Liu, Henny Verheugen, Kevin Vetsuypens and David Wang · Milliman · 2025 · CFE101-117-26

Study guide: Exam CFE-101

A Milliman report, dated February 2025, that describes the key components and design choices in modeling economic capital and how they differ across jurisdictions. It treats whether to take a market-consistent or real-world approach to the balance sheet, which risks to include, the challenges in measuring different risk drivers, and the modeling choices that determine economic capital. Milliman states that the paper was commissioned and partially funded by the Society of Actuaries.

On the syllabus

  • Exam CFE-101 — CFE101-117-26: Economic Capital Modeling-Practical Considerations; outcomes 2.2b, 2.2c, 2.2g, 3.3a-3.3c.

Introduction

Glossary of acronyms and abbreviations

1 What is economic capital?

2 What are the benefits of economic capital analysis?

3 Lenses to economic capital

  • 3.1 Market-Consistent Valuation
  • 3.2 Market-Consistent Versus Real-World?
  • 3.3 Europe
  • 3.4 United States
  • 3.5 Canada
  • 3.6 Asia
  • 3.7 Insurance Capital Standards
  • 3.8 Equivalence Principle

4 What types of risks should be considered?

  • 4.1 Risk Categories
  • 4.2 Components of Risk Modeling

5 How should each of those risks be measured?

  • 5.1 Approaches to Measure Risk
  • 5.2 Application to Different Risks

6 What modeling decisions should inform the analysis?

  • 6.1 Risk Measures
  • 6.2 Aggregation of Risks
  • 6.3 Time Horizon to Consider
  • 6.4 Management Actions and Policies
  • 6.5 Methods to Reduce Computational Complexity

7 Illustrative examples

  • 7.1 Capital Requirement Under Solvency II - SCR Calculation
  • 7.2 Required Capital Using a Copula for Individual Risk Aggregation
  • 7.3 U.S. STAT

8 Appendix - Example 7.2 – Copula: Step by step

  • 8.1 Inputs
  • 8.2 Required Capital Calculation

Sources