2025 SOA Valuation Actuary Meeting: Session 2H: Economic Capital Modeling: Practical Considerations-08.18.25-Recording

In 2006, a pioneering research paper was published on practical considerations for Economic Capital (EC), which has remained a staple on the Society of Actuaries (SOA) exam syllabus ever since. For many, that time represented the golden era of EC-often dubbed the œquantification of Enterprise Risk Management (ERM)-with nearly every major U.S. life insurer performing some form of EC calculation. However, following the 2008-2009 financial crisis, EC fell into disfavor in some circles. Several companies that appeared healthy from an EC perspective prior to the crisis were found to be far more vulnerable afterward. Today, many recent entrants to the life insurance industry view EC as a lower priority compared to other metrics when supporting strategic decision-making.Last year, the SOA commissioned a refresh to the original paper. The result, Economic Capital Modeling: Practical Considerations-authored by Tony Dardis, Jorren Jacobs, Bryan Liu, Henry Verheugen, Kevin Vetsuypens, and David Wang-was published in February 2025. This updated paper revisits the EC landscape from a global perspective and explores topics such as: Whether to take a market-consistent or real-world approach when determining the balance sheet, Which risks to include in an economic capital model, Key challenges in measuring different types of risk drivers, Important modeling choices when determining economic capitalIn this session, the authors will discuss the paper's findings and engage in a dialogue with senior industry risk practitioners about the evolving uses of EC-its benefits, limitations, and its role in modern risk management.