European insurers use economic capital more than Northen American counterparts

European insurers lead their North American counterparts in using economic capital (EC) to guide their risk-based decision-making, a Towers Perrin study shows.
“European insurers are giving greater short-term priority to the use of EC within their decision making processes (56%), compared to their brethren in North America (40%) and in the Asia/Pacific region (38%),” Towers Perrin notes of its survey results.
“Additionally, within the next two years, European insurers said they expect to use EC in most major decision processes (80% to 90%), compared to North American firms (60% to 75%) and those companies in the Asia/Pacific region (50% to 65%).”
Economic capital is a process used to assess risk in Enterprise Risk Management (ERM).
EC represents the amount of capital required to absorb an unexpected loss, BNet Business Network notes. It is often distinguished from “book capital,” which is an accounting measure that reflects the sum of invested capital and retained earnings.
Book capital does not necessarily go down if risk increases (i.e. it will only go down when actual losses occur), whereas economic capital automatically increases the moment risk exposures increase.
Thus, economic capital is a useful tool in determining capital adequacy.
Having EC capabilities, especially under Solvency II, is expected to lead to both lower capital requirements and a competitive advantage in both the short and long term, Towers Perrin notes.
Participants in Towers Perrin’s global, Web-based survey included 359 insurance and reinsurance executives. Survey respondents were split between North America (49%) and the rest of the world, including 29% from Europe.