Economic vs Regulatory Capital

[SpringbokSupporter]

Economic capital => amount a company expects to realistically hold given its liabilities and business objectives.
Regulatory capial => amount a company hold so that it meets its liabilities on on a prudent/cautious basis.

Is it correct to say that Economic capital includes an element for future new business whereas the regulatory capital does not?

 

[Adam Balusik]

My understanding of it is that the purpose of economic capital is to better reflect the realities of a business' risk profile and ensure solvency on a going concern basis. That said, capital is held so that the company may meet its commitments. So in terms of new business, the company does not yet have those obligations and as such may not need to hold capital, unless the company needs money in order to acquire new business and then it would likely account for this in its economic capital calculations.

Regulatory capital could also require a business to account for these types of costs. However, it is also likely to be influenced by the materiality of these capital holdings.

 

[YiweiZhao]

I think regulatory capital doesn't have new business taken into account. However, regulatory requirement to undertake an ORSA includes a solvency capital projection, which may be equivalent or similar to an internal economic capital assessment.