Risk Management can be defined as a discipline for living with the
possibility that future events may cause adverse effects. In the
context of risk management in financial institutes such as banks and
insurance companies these adverse effects usually corresponding to large
unexpected losses. Examples of such losses could be due to risks of
asset, insurance, market, credits (for banks), operational, etc.
Economic Capital (EC) has recently gained great attention in the
insurance industry. The EC will allow a company to measure risks
undertaken and manage the risks. Regulatory and Rating Agency Capital
defined its use: determining solvency and creditworthiness of an
organization. The capital required from regulators is a generic
formulated driven and are based on industry averages which may or may
not suitable to any particular company. The EC is based on calculations
that are specific to the company's risks. EC impacts many company
business manage and decision-making processes.
We discuss the general formulations for the aggregate economic capital,
risk measurement, risk interactions, close-form solution under certain
assumptions. The current practices of modeling economic capital are
employed among insurance companies. The general modeling process in
obtaining the aggregate economic capital will be disclosed. In the
modeling of EC, it is essential that each major risk is modeled
accurately. We will example some risk modeling in this respect.
