Economic Capital Models (“ECMs”) are a hot topic of discussion within the insurance industry: what is the target level of confidence?
As a consequence of globalisation, public expectations have risen that businesses should behave responsibly and accountably in terms of minimizing their environmental and social footprint. Even though this footprint is low for the insurance industry due to the service nature of its operations, headline risk has nonetheless increased.
This best practice paper details considerations and best practices on how these principles can be applied to the extrapolation of interest rates, equity and interest rate implied volatility and in situation in which an option has been written on a security for which no liquidly traded options exist at all.
The CRO Forum’s views on the consequences for Enterprise Risk Management and regulation in the insurance industry.
For a long time, many (re)insurance companies have realized the need for risk-based valuations and solvency capital measurement and have started developing internal economic capital models which suit their needs. This is without prompting from regulators and rating agencies. Why? Such models provide a common measurement basis across all risks (e.g. same methodology, time horizon, risk measure, level of confidence, etc.) and are a powerful tool for strategic decision-making, for example in capital allocation and pricing.