Economic capital and other advanced risk-based capital methodologies enable financial institutions to quantify the risks they face, the capital needed to cover them, and the real risk-adjusted returns being made or should be targeted.
While interest in such frameworks is increasing in the wake of the move to risk-based prudential regulation including Basel II and Solvency II, the overriding benefits are the ability to enhance strategic and tactical decision-making and optimize shareholder wealth. Risk-based capital evaluation can help organizations spot threats and weaknesses, identify opportunities that may be missed by competitors, and target investment where it can earn its best return. It can also help align risk appetite with capital allocation and communicate the tangible strengths and potentials of the business to analysis, investors, and rating agencies.
However, risk-based capital evaluation is only as good as the reliability of the data, validity of the assumptions, and the quality of application underpinning it. The data may be incomplete or inconsistent. Even if the desired data is available, it could be dangerous to give too much credence to model outputs without the sense check of experience and intuition.
How PricewaterhouseCoopers can help you
PricewaterhouseCoopers has a proven track record in the implementation and development of risk-based capital management through design, build, integration, and validation.
The basis of our approach is the recognition that risk-based capital management and its underlying assumptions require constant challenge, refinement, and alignment with the specific characteristics of the business to ensure the framework can provide a credible source of information, assurance, and insight for management.
