Economic Capital

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EconomicThis document has been made available on www.actuaries.org.uk with the permission of the Society of Actuaries, Schaumburg, Illinois. Copyright 2008.

Specialty Guide on Economic Capital

Version 1.5 March 2004

Specialty Guide on Economic Capital

Section
I. II.

Page

FOREWORD...................................................................................................................1 INTRODUCTION AND OVERVIEW ...............................................................................2

III. EXECUTIVE SUMMARY ................................................................................................3 IV. HOW DO WE DEFINE ECONOMIC CAPITAL? ............................................................5
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Specialty Guide on Economic Capital

3

III. Executive Summary
Economic Capital (“EC”) has become a topic discussed at various industry conferences, received attention by regulators and rating agencies, and has shown up over the years in various other disciplines, in particular in the banking industry. While the topic is becoming more mainstream, a standard definition of EC is not readily available, as shown by the wide variety of responses to our Economic Capital Survey. While specific definitions vary, some common threads tie the various descriptions together: Sufficient surplus to cover adverse outcomes, A given level of risk tolerance, and A specified time horizon. An assortment of risks and various tolerance levels utilized by companies are listed in this document, based on the survey results. Although virtually all types of risks are mentioned, development work to date has been more focused on financial risks, and therefore the document primarily explores these in more detail. While Regulatory and Rating Agency Capital have fairly well defined uses (i.e., determining solvency and creditworthiness of an organization), Economic Capital impacts many company business management and decision-making processes. EC can also have quite a few macro applications within a company. For example, a company can be
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