Risk Management
Task Force

Economic Capital Calculation and Allocation (ECCA) Minutes

 
Economic Capital Calculation and Allocation (ECCA) Subgroup
March 12, 2004
9:30 a.m. Central Time


Participants: Jenny Bowen (Leader), Mike Cohen, Brett Roush, Keith Floman, Nathan Greenlee, Steve Marco, Sanjay Menon, Jeff Mohrenweiser, Hubert Mueller, Peter Patrino, Julie Young (SOA)

Test-Case Project

  • We have been looking for a way to compare different methodologies for calculating and allocating economic capital. The papers that are out there now don’t show how the methods will be useful to the practitioner, and any examples given in them are too specific to allow translation to examples in other sources.

  • Five people volunteered to help put together an example on Economic Capital. Brett Roush had a call a few weeks ago and only two people who volunteered were able to attend the call.

  • Brett contacted the SOA to see if people can do calculations as part of their PD plan, but he has not yet heard whether that will be feasible. Going forward, actuarial students will be exposed to this topic, as the ECCA Specialty Guide will be on the Course 8 Investments exam.

  • The rating agency participants in our discussion (A M Best, Moody’s, Fitch) agreed that they were not hearing evidence from companies’ management that this has been studied in enough detail that companies are prepared to answer the questions we’re asking. The few that might have developed such methodologies are not comfortable enough to discuss their calculations with the rating agencies, much less share them this publicly.

  • We decided to postpone work on this project until Economic Capital models are better understood and are more “common speak”.

Reports from correspondents

Brett -- NAIC quarterly meeting will take place early next week.

Hubert – AAA Life Capital Adequacy subcommittee is presenting its C3 Phase 2 proposal at the NAIC quarterly meeting, and is optimistic that it will be approved at the NAIC June meeting.

Sanjay – Moody’s is still circulating a Special Comment on its updated capital model. Companies continue to be interested in explicit mapping of factor-based ratios to ratings. Moody’s prefers to use these factor-based capital ratios as just part of the picture, and will be incorporating C3 Phase 2 scenarios into its model. The capital adequacy modeling is even more challenging since Moody’s continues to be constrained by its policy of using publicly available information.

Peter -- Fitch is working on updating its proprietary capital models, in a manner similar to the C3 Phase 2 methodology. Fitch is a few months away from having an industry report ready to circulate.

Monitoring Literature
No report--Steve Meyers was not able to participate in this call.

Article for RM Newsletter
Deadline is May 1. (Newsletter comes out in July)
Next deadline is early August. (Newsletter comes out in October)
Jenny will write a summary of this subgroup’s activities and correspondents will provide any newsworthy items relating to their “beats”.

ACTION ITEMS:
(Correspondents) Send your news updates to Jenny Bowen by April 16.
(All) If you have any ideas for an article send idea or article to Hubert Mueller.

Specialty Guide Update
The ECCA Specialty Guide appendix has been updated, mostly for cosmetic changes, and will replace the current version on the website, probably within a few weeks.

Next Call
April 16 at 9:30 a.m. Central Time.

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