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🏦 '''Economic capital assessment (ECA)''' is an internal risk-quantification exercise through which an [[Definition:Insurance carrier | insurance company]] determines the amount of capital it needs to absorb potential losses across all material risk categories at a chosen confidence level — typically aligned with its own [[Definition:Risk appetite | risk appetite]] rather than a regulatory minimum. Unlike the standardized formulas prescribed by [[Definition:Solvency II | Solvency II's]] [[Definition:Solvency capital requirement (SCR) | SCR]] or [[Definition:Risk-based capital (RBC) | risk-based capital]] frameworks in the United States, an ECA reflects the insurer's unique risk profile, including correlations between [[Definition:Underwriting risk | underwriting]], [[Definition:Market risk | market]], [[Definition:Credit risk | credit]], and [[Definition:Operational risk | operational]] risks that generic regulatory models may oversimplify.

📐 The process typically begins with individual risk models — [[Definition:Catastrophe modeling | catastrophe models]] for natural perils, stochastic [[Definition:Reserving | reserving]] models for long-tail [[Definition:Liability insurance | liability]] lines, asset-liability simulations for [[Definition:Investment risk | investment portfolios]] — whose outputs are then aggregated using a [[Definition:Dependency structure | dependency structure]] (often a copula framework) that captures how risks interact under stress. The resulting economic capital figure represents the financial cushion the insurer believes it needs, at a specified probability (e.g., 99.5% over one year), to remain solvent through an extreme but plausible scenario. Many large [[Definition:Reinsurance | reinsurers]] and global carriers maintain dedicated economic capital teams that update the model quarterly, feeding results into strategic planning, [[Definition:Capital allocation | capital allocation]], and performance measurement.

🎯 An ECA's real power lies in decision-making. When a carrier knows the economic capital consumed by each [[Definition:Line of business | line of business]], product, or geographic segment, it can compute risk-adjusted returns and direct capital toward the most profitable opportunities. [[Definition:Rating agency | Rating agencies]] like [[Definition:AM Best | AM Best]] and [[Definition:S&P Global Ratings | S&P]] increasingly expect carriers to demonstrate a robust internal capital model as part of their [[Definition:Enterprise risk management (ERM) | enterprise risk management]] frameworks, and a well-articulated ECA can support a more favorable [[Definition:Financial strength rating | financial strength rating]]. For [[Definition:Managing general agent (MGA) | MGAs]] and [[Definition:Insurtech | insurtechs]] seeking capacity, understanding how their capacity providers conduct ECAs helps explain why certain risks attract competitive terms while others face restrictions — the economic capital charge behind the scenes is often the deciding factor.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Solvency capital requirement (SCR)]]
* [[Definition:Risk-based capital (RBC)]]
* [[Definition:Enterprise risk management (ERM)]]
* [[Definition:Own risk and solvency assessment (ORSA)]]
* [[Definition:Capital allocation]]
* [[Definition:Catastrophe modeling]]
{{Div col end}}

Definition:Economic capital assessment (ECA) - Revision history

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