Economic capital / Other risks [7]

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Bullet points include: Reasons for favouring economic rather than regulatory/rating agency based capital cited in Specialty Guide on Economic Capital 2004: Economic capital reflects underlying economics of business as opposed to political and rating agency conservatism Regulatory and rating agency capital may not allow for some risks a company faces, such as interest rate guarantees, guaranteed surrender values and a whole range of operational risks Since regulatory capital varies by jurisdiction, if a large institution working across many jurisdictions were to make decisions based on Regulatory Capital requirements, it may have different strategies for each region, forfeiting gains from economies of scale Opportunities to hedge difference between Regulatory and Economic capital, i.e. ‘rule arbitrage’ Economic capital can be compared more directly across lines of business, e.g. banking products versus insurance products

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