All general insurance companies including 3 standalone health insurance companies Max Bupa, Star Health, and Apollo Munich Health have been ordered by the Insurance Regulatory and Development Authority (IRDA) to calculate their economic capital for the business ending March 31, 2011.
Economic Capital (EC) is calculated by determining the amount of capital that the insurer needs to ensure that its realistic balance sheet stays solvent over a certain time period with a pre-specified probability. For example – the EC may be determined as the minimum amount of capital required to make 99.5% certain that the insurer remains solvent over the next twelve months.
EC can be defined as sufficient surplus to cover potential losses, at a given risk tolerance level, over a specified time horizon
According to IRDA, EC plays a central role in the financial management of an insurance company for solvency & capital efficiency, risk monitoring & control, mergers & acquisitions, business planning, risk-based pricing, risk-based decision-making, performance measurement & management.
The framework for estimating EC has been released and for calculating purposes, insurers will need to consider underwriting risks like premium risk and catastrophe risk, market risks like currency and interest rate risk; and other risks.
This needs to be submitted by all non-life insurance companies to IRDA on or before September 31, 2011.
Click here to read all insurance news and articles.
