Economic capital for life insurance with-profit long-term business funds

Bruce T. Porteous

Abstract

ABSTRACT

Using stochastic asset and actuarial models, we estimate the amount of economic capital that UK life insurance firms need to cover the investment guarantees written in their with-profit long-term business funds. Economic capital is then compared to Pillar 1 regulatory capital. Falling equity markets, in conjunction with a forthcoming new regulatory regime for UK life insurers, give the work particular relevance. Banking and insurance approaches to investment guarantees are contrasted. Our main conclusion is that Pillar 1 regulatory capital is not adequate to cover economic capital and the implications of this are discussed.