Actuarial Notes

Economic Capital for Life Insurance Companies

By Ian Farr, Adam Koursaris and Mark Mennemeyer · Society of Actuaries · 2016

Study guides: Exam ILA-201I, Exam ILA-201U

A research paper, dated October 2016 and sponsored by the SOA Committee on Finance Research, that addresses key questions on the calculation of economic capital (EC) for long-term life insurers. It discusses the drivers of economic capital, the development of an internal EC framework and the uses of EC within an insurance company, and is a refreshed edition of a 2008 EC report that can be read as a standalone document.

On the syllabus

  • Exam ILA-201I — Capital Management, outcome 2c; Economic Capital for Life Insurance Companies, SOA Research Paper, Oct 2016 (only sections 2 & 6).
  • Exam ILA-201U — Capital Management, outcome 2b; Economic Capital for Life Insurance Companies, SOA Research Paper, Oct 2016 (Sections 2 & 6).

Section 1 Acknowledgements

Section 2 Background and Scope

  • 2.1 Background
  • 2.2 Scope
  • 2.3 Fundamentals

Section 3 EC Methodology and Modeling

  • 3.1 Main Considerations
  • 3.2 The Liability Runoff Approach
  • 3.3 The Finite Risk Horizon Approach
  • 3.4 Contrasting runoff and finite horizon approaches
  • 3.5 Risk Aggregation
  • 3.6 Pros and Cons of EC Approaches
  • 3.7 Prevalence of Approaches

Section 4 Risk Calibration and Validation

  • 4.1 Risk Metrics
  • 4.2 Risk Factors

Section 5 Influence of Market and Supervisory Developments

  • 5.1 Global Financial Crisis
  • 5.2 Solvency II
  • 5.3 Own Risk and Solvency Assessment
  • 5.4 Global Capital Standards
  • 5.5 U.S. Federal Regulatory Activities

Section 6 Applications of Economic Capital

  • 6.1 Capital Adequacy
  • 6.2 Capital Allocation
  • 6.3 Risk Appetite
  • 6.4 Performance Measurement
  • 6.5 Strategic Planning
  • 6.6 Pricing
  • 6.7 Mergers & Acquisitions

Section 7 Implementation and Communication

  • 7.1 Objectives
  • 7.2 Constraints
  • 7.3 Governance
  • 7.4 Validation
  • 7.5 Reporting

Sources