An Economic Capital Model (ECM) is a powerful tool for modeling financial statements for planning and forecasting purposes. It is also used to test how alternate business strategies or scenarios might impact your firm’s finances especially capital strength.
What is ECM?
An ECM is a model of the key parts of your firm’s finances and risk profile. Modeling covers risk sources such as underwriting and catastrophe, adverse reserve development, market risk, inflation, credit, and operational risk. We use information about your operations to set up the ECM.
Our ECM uses a probability-based generator to estimate future financial results and produce pro forma financial statements. The ECM generates individual possible years, from adverse to favorable including those in between, based on their estimated probability. Analyses span a future horizon of one up to five years.
The ECM output covers a full range of confidence levels. Output can also include value at risk (VaR) and tail value at risk (TVaR) metrics. An ECM can be used as part of an Enterprise Risk Management analysis, or as a stand-alone model.
What is the value of ECM?
Economic capital affects many areas of your firm and should inform many underwriting, investment, and strategic decisions. An ECM enables management to quickly and easily examine the financial and capital impacts of alternative courses of action. ECM output can be widely used to inform and justify decision-making and the timing of actions including the following:
- Identify and manage the relationship between profits, growth, cash-flow and your balance sheet;
- Assess risk appetites, tolerances and limits;
- Inform business planning including the future mix of business by product or geography;
- Evaluate reinsurance program retentions and limits;
- Support production of an Own Risk and Solvency Self-Assessment (ORSA);
- Allocate capital across statutory entities or business segments;
- Measure performance;
- Evaluate investment philosophy and asset allocation; and,
- Analyze product pricing or ratemaking.
How can Huggins help?
Huggins combines years of C-Suite, consulting, and insurance company experience with a state-of-the-art ECM platform. We can customize the ECM to your firm’s current or projected future risk profile. We can also customize the dashboards and reporting packets to make sure you get the information you need in the form you want.
The Huggins Advantage
Our firm’s philosophy centers on our commitment to the highest level of quality service delivered by quality people. Our long tradition of providing responsive, technical excellence to our clients’ needs through an integrated team approach requires that we focus on quality in every aspect of every engagement.