This chart below, a truncated version of an illustration from a 2014 Towers Watson report, “Achieving Near-Real-Time Risk Monitoring: Risk Appetite Revisited,” represents the sources of enterprise capital model risks that underpin life insurers’ results.
The model allocates the required economic capital based on the aggregate risk distribution back to individual business portfolios and to risk drivers. The rows of the grid (the risk drivers) reflect key risks within the model that could impair a life insurer’s mission through capital depletion. The columns of the grid divide the business into distinct business portfolios, showing how they contribute.
“One can see that the grid itself is a powerful source of management inforrmation, as it shows how the various risks and business units are contributing to the overall need for capital by the enterprise,” the report states. “In essence, economic capital becomes the standard unit of measure for all types of risk, across all types of business units.”
|Required economic capital by business unit and risk driver (illustrative)|
|Risk category||Individual life||Corporate life|
|Credit risk subtotal||1467||634|
|Foreign exchange rates||531||228|
|Market risk subtotal||7,927||1,233|
|Life insurance risk||1,118||746|
Source: Towers Watson