Asian life insurers: Unlocking potential and current applications of economic capital

Market volatility, increasing climate and pandemic risks, as well as greater pressure from stakeholders seeking value and return, are all combining to create opportunities and challenges for insurers. The ability of internal economic capital (EC) models to help insurers understand risk and make strategic decision has driven a majority of life insurers across Asia to include these models as part of their management reporting and risk management processes, supplementing the more generic and blunt measures such as regulatory capital.

In order to better understand how capital models support business decisions, we surveyed a cross-selection of insurers in Asia about their use of capital models. Our survey results incorporate responses representing 25 insurers in Hong Kong, Singapore and South Korea, with assets ranging from less than $25 billion to over $100 billion.

Our survey shows that:

• 64% report their EC positions at least quarterly
• 40% are able to report within four weeks after the valuation date
• 88% have regular risk-based local regulatory capital reporting in place
• 76% conduct internal EC reporting, while the remaining 24% plan to implement EC in the short- and medium-term future
• 63% identified faster model run times as a key issue, followed by risk parameterisation and calibration, and results analysis capabilities.

When asked how they would rate the importance of EC to the business over the next five years (Figure 1), risk management and asset liability management are expected to remain key activities, with notable anticipated increases in importance for areas such as product pricing, merger and acquisition, performance measurement and business strategy.

Figure 1: Importance of EC in various business activities within the next five years

Furthermore, in order to increase the sophistication of EC, widen the scope of use in business activities and to thereby gain competitive advantage, 63% identified faster model run times as a key issue, followed by risk parameterisation and calibration, and results analysis capabilities (Figure 2).

Figure 2: Current key challenges of the economic capital production process

Our view is that for life insurers to continue to be successful, effective implementation of EC and improving capabilities around EC modelling will be of significant benefit to Asian insurers.

Download our report for detailed findings from the survey and learn more about the steps you can take to improve the benefits of using EC models for your organisation.