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

Bruce T. Porteous

Journal of Risk

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.

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