Economic Capital Benefits

Question 1

Economic Capital Benefits

Answer 1

• Consistent with the regulatory regime targets
• Avoids risk from firms holding inadequate provisions without introducing inefficiencies from unduly higher provisions
• Hold capital appropriate to inherent risks
• Promote confidence in the markets if analysts believe that companies are holding suitable capital for the risks they hold
• Easy to explain to management to ensure better risk management.
• Avoids the risk that firms “game” the regulatory systems
• Consistency with overseas providers
• Avoids undue strength of provisions which would result in higher cost of such financial products
• Avoids inadequate provisions which would result in company failures