KPMG: Economic Capital Modeling Benefits

By Rob Starr, Content Manager, Big4.com

A KPMG International survey of the world’s top insurers shows that a lack of understanding at the very top could hinder economic capital (EC) modeling although it  has the potential to transform the way organizations control risks and manage their businesses right across the global insurance industry.

Economic Capital Modeling in the Insurance Industry, is the KPMG survey showing EC modeling is a way of calculating how much capital a business needs to meet its future risk. Most global insurers now use EC methods, in some way, to support their risk management systems.

However, while 79 percent of survey respondents are using EC modeling for risk management, fewer of them are realizing the potential advantage of using it to other strategic decisions such as to support pricing and underwriting decisions (55 percent).

These results suggest that a short-term focus on regulatory compliance is masking a lack of understanding of the longer-term strategic advantages of having a fuller appreciation of the business’s risk and capital profile. Forty percent of respondents indicated that management understanding of EC is limited. European companies tended to rank management understanding higher than other territories, which is not surprising in light of Solvency II modeling requirements. But even in this region, KPMG found that management understanding needs improvement.