The Insurance Regulatory & Development Authority (Irda) has asked domestic life insurers to initiate the process of calculating economic capital and submit the same along with the appointed actuaries? annual report for the year ending March 2010.
In this context, the basic reference material is the ?Report of the Committee to draw the road map for moving towards Economic Capital and market consistent embedded value for life insurance industry in India (June 8, 2009)? constituted by the Institute of Actuaries of India for this purpose.
Whenever the appointed actuaries deviate from the suggested practice they have to explain the rationale of the same and give further details, said Irda.
This circular comes into effect for the actuarial valuation of the liabilities for the life insurers since March end 2010. According to Irda, at this stage it is envisaged that this exercise will be done on an annual basis, coinciding with the actuarial valuation for the March end position.
On the basis of experience the contents of the circular would be reviewed on or before October 30, 2010.
At its most basic level, economic capital can be defined as sufficient surplus to cover potential losses at a given risk tolerance level, over a specified time horizon.
The word economic indicates the fact that it measures risk in terms of economic realities rather than regulatory or accounting rules which may been designed to support non-economic principles
Typically , economic capital 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.