Does excess capital mean either economic capital or available capital? I'm confused about how they are related to each other. Below is from Sep 2010 Q5. Economic capital The level of capital required to achieve management objectives It would typically be the output of a risk based capital modelling exercise Available capital The excess of assets above liabilities (or free reserves) Note that would typically be on either a statutory balance sheet or an economic balance sheet (although could be on other bases), and the valuation for both assets and liabilities might differ depending on the basis (e.g. in valuing assets on a statutory basis, inadmissible assets might be excluded) Excess capital The excess of available capital over required capital, on either a regulatory or economic basis
As you have discovered you need to be very careful when you use these terms as some people can define them to mean slightly different things. If in doubt in an exam define what you mean clearly. Available capital is how much capital you have at your disposal (ie the excess of your assets over your liabilities). Economic capital is how much capital you think you need to meet your objectives, whilst regulatory capital is how much the regulator says you need. Excess capital is the amount of capital you have (ie available capital) less either your economic or your regulatory capital depending on which you are talking about. Have another look at Section 1 of Chapter 19.
