An Economic Capital Model (ECM) is a powerful tool for modeling the Income Statement, Balance Sheet, Cash Flow, Policyholder Surplus, and other financial statements for Planning and Forecasting purposes. It is also used to test how alternate business strategies or scenarios might impact the organization’s finances.
What is ECM?
An ECM is a model of the material aspects of your organization’s finances and risk profile. Modeling can contemplate multiple risk sources such as underwriting, reserve, liquidity, catastrophe, asset, reinsurance credit and operational risk. Based on detailed information about an organization’s operations, an ECM uses a probability-based scenario generator to estimate future financial results, producing pro forma financial statements for prospective years.
The ECM provides results at 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 Framework, or as a stand-alone model.
What is the value of ECM?
Economic capital affects many areas of insurance company operations and should inform many underwriting and investment decisions. An ECM allows management to quickly and easily examine the financial and capital implications of alternative business strategies or operational scenarios. ECM output can be widely used to inform and justify management 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 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 parameterize the ECM to your organization’s current or projected future risk profile in order to produce pro forma balance sheet, income statement and other financial statement exhibits over a single or multiple-year projection horizon.
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