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The Actuary The magazine of the Institute & Faculty of Actuaries

Prudential publishes economic capital analysis

Prudential plc published important new financial disclosures on 2 June. Philip Broadkey, finance director, commented: ‘The difference between the regulatory capital view and the economic capital view is really one of being able to look at the group as a whole; recognise the fact that we’ve got operations in the UK, Asia, and the US, and that economic conditions and investment returns, and so on, will never be quite the same in all of those markets at once. The technical term for it is “diversification benefit”.

‘So what we do, with the economic capital model, is imagine 1,000 different scenarios of investment performance, adverse conditions that could apply to the group, but recognising that the same things won’t be happening in all of the markets at once. What we then do with this model is to run forward over 25 years to think about the effect of those investment conditions and make sure that we’ve got sufficient capital to meet almost all of these adverse scenarios that we imagine. And that we have sufficient capital at the end that enables us to say, with the same sort of confidence as would apply to a AA bond rating, that we’ve got sufficient capital to meet these adverse conditions that could befall us.

‘I think a lot of insurance groups are working on something similar and there are two reasons why we’ve built it. The first is linked to the way we want to present information to investors. We want to be able to demonstrate that we are allocating the right amount of capital, justified by the model, to the business that we’re writing and on which we measure our returns.

‘And the second reason is to help shape a discussion that is taking place across Europe now as to the next stage of the regulatory agenda, the so-called Solvency II Project, which is likely to take into account the sort of features that we’ve built into our model as regulators look at, again, improving the way in which they look at capital needs for insurance groups.’

For more visit www.prudential.co.uk/prudentialplc/investor_home/pressreleases/pressrelease/?id=3668693