1
Q
What can Economic Capital models be used for?
A
- Determine the company or product risk profile
- capital budgeting
- insurance product pricing
- capital needs for merger or acquisition
- risk tolerance/constraints
- setting investment strategy
- disaster planning
- performance measure
2
Q
What is the Economic Capital Modelling process?
A
- Identify purpose
- Identify and rank risks
- Choose the simulation approach for each risk
- Define the risk metric I.e. TVar / Var, time horizon, confidence interval
- Select the modelling criteria
- Decide on the method of implementation- type of model
3
Q
What are the considerations for the ECM process?
A
Capital reduction and injections
Management actions in a crisis
The time period
4
Q
Define SHV? (shareholder value)
A
Discounted CFs of all future cash flows = EV
= EC x (RAROC - g/ hurdle - g)
g = growth rate
5
Q
Define SHVA? (shareholder value added)
A
= EC x ((RAROC - g/ hurdle - g) -1)
g = growth rate
6
Q
What are the capital allocation approaches?
A
- retained centrally in main corporate business line
- allocation by a risk measure
- marginal approach - change in capital as a result of adding to diversified portfolio
- allocated with game theory approach
- allocated with some pro-rata basis
- calculated on stand-alone basis
7
Q
What are the 7 lessons learnt from case studies?
A
- Know your business / customer
- Establish checks and balances
- Set limits and boundaries
- Keep your eye on the cash
- Use the right yardstick
- Pay for the performance you want
- Balance Ying and yang - “soft” skill management
8
Q
Define economic Capital
A
The amount of capital held to be able to meet liability obligations under adverse conditions with a given probability over a defined time horizon
