Economic Capital and Risk Modeling. February 22, 2008 • Iowa Actuaries Club Session #2. Jeff Fitch, Senior Actuary - Corporate . Outline. Principal’s Risk Metric and Economic Capital Framework Lesson’s Learned from Principal’s Implementation Applications of Economic Capital models
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February 22, 2008 • Iowa Actuaries Club Session #2
Jeff Fitch, Senior Actuary - Corporate
3 Primary Risk Metrics
Economic Reserves (cover obligations based on our
best estimate of claims plus a margin)
Economic Capital (cushion on top of Economic Reserves
to cover potential obligations from unanticipated adverse experience)
Mortality Risk, for example, can be broken down into 4 components
Medium Term Uses:
Long Term Uses:
Two methods have emerged as the most common:
Many possible combinations!
Company has Capital of 25, Borrows 75 at 4%, and invests 100 in equities expected to earn 8%