Risk Management
Task Force

Economic Capital Calculation and Allocation (ECCA) Minutes

 

Economic Capital Calculation and Allocation (ECCA) Subgroup
February 13, 2004
9:30 a.m. Central Time

Participants:
Jenny Bowen (Leader), Mike Cohen, Rhonda Lessard, Steve Meyers, Brett Roush, Nathan Greenlee, Keith Floman, Peter Patrino, Jose Siberon, Kevin Reimer, Scott Robinson, Sanjay Menon, Hubert Mueller, Kevin Dickson

Reports from Correspondents

  • David Ingram could not join the call. He sent a report related to the UK regulatory updates. In UK, the FSA has issued a new consultation paper CP204 “Financial Groups” that addresses how they will regulate combined bank and insurance enterprises, including those with cross border affiliation.

  • NAIC—The next meeting is sometime in March 2004 to discuss further the current proposals for regulatory changes.

  • AM Best – Published the latest version on the risk adjusted capital.

  • Standard & Poor’s will be publishing an article updating the description of the capital adequacy model. The article was published on February 19, 2004 and can be found in its website: www.standardandpoors.com.

  • Moody’s – A preliminary draft of a capital model is being reviewed, but will probably not be widely distributed for another 2-3 months.

  • AAA – The life capital adequacy committee had a meeting recently but most of the items will be resolved and/or discussed in more detail at the NAIC March 2004 meeting in NY. A proposal for the NAIC C3 Cash Flow Test II will be submitted for approval by June 2004. Hubert said that there is about 90% probability that the chances will be approved but this is slightly down from last month 95% chance. The proposed changes could produce a higher capital for GMIB than for other types of guarantees and it is also depended on when the guarantees were sold. Hedges will be considered to offset some of the capital but there is no clear definition or methodology yet. May be solved by running two scenarios: with and without the effect of the hedges. Some companies are currently hedging the gammas and the vega risks.

ECCA Test-Case Project
Five people have volunteered to help put together an example on Economic Capital. Brett will set up a meeting with these volunteers to refine the draft. Jose will send Brett an old publication on risk-adjusted return on capital calculations for insurance companies. The article describes an example on how to calculate economic capital.

Monitoring Literature
Steve is keeping in touch with the people who have volunteered to review articles. He is still in the process of reviewing what has been done and expects to be ready to report on the status of this ongoing work by the next conference call.

Next Call
Friday, March 12th, at 9:30am Central Time.

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