Traditional measures fall short: There is a lot of empirical evidence that suggests that simple measures such as standard deviation, VaR or Conditional Tail Expectation, are not sufficient to adequately measure economic capital. 

We think that the most practical framework of measuring Economic Capital is using stochastic economic scenarios. The framework must allow the various risks to have covariance. Interest rate risk (asset-liability), mortality risk, and lapse risk are going to be the primary drivers of economic capital for a life insurance company.

And although economic capital tends to focus on investment outcomes, operational risk cannot be ignored. For instance, if an insurance company faces risk in its distribution channels, such as with commissions, or with marketing (branding), then such risk needs to be modeled as well. The model risk with respect to the valuation of assets must be assessed. Policyholder behavior is another key risk, particularly around unit-linked products. As insurers race to innovate and create more attractive and unique policy features, the risks of those features will not be captured anywhere other than economic capital. 

At Annuity Risk, we are eager to assist insurers in developing a robust framework for measuring economic capital. There are great many uses of such a framework, all of which greatly strengthen the insurer and add to its competitive advantage.