TABLE 8
FROM:
Insurers are not Banks: Assessing Liquidity, Efficiency and Solvency Risk Under Alternative Approaches to Capital Adequacy
Paul Kupiec and David Nickerson
BACK TO ARTICLETable 8. Implied regulatory equity capital for representative insurer
| State | Probability | Payment on a par 5 loan to type A firm | Payment on a par 5 loan to type B firm | Maximal funding by contingent contract: | Residual insurer equity on type A loan | Residual insurer equity on type B loan | Market value of insurer equity for type A loan | Market value of insurer equity for type B loan |
|---|---|---|---|---|---|---|---|---|
| 1 | 0.05 | 1.5 | 4.5 | 1.5 | 0 | 3 | 0 | 0.15 |
| 2 | 0.1 | 4 | 5 | 4 | 0 | 1 | 0 | 0.1 |
| 3 | 0.2 | 5 | 5 | 5 | 0 | 0 | 0 | 0 |
| 4 | 0.3 | 5 | 5 | 5 | 0 | 0 | 0 | 0 |
| 5 | 0.2 | 5 | 5 | 5 | 0 | 0 | 0 | 0 |
| 6 | 0.1 | 5 | 4 | 4 | 1 | 0 | 0.1 | 0 |
| 7 | 0.05 | 4.5 | 1.5 | 1.5 | 3 | 0 | 0.15 | 0 |
| Market loan value: | 4.7 | 4.7 | ||||||
| Market value of contract funding: | 4.45 | |||||||
| Equity capital requirement (ECR): | 0.25 | 0.25 | ||||||
| ECR percent of loan value: | 5.62% | 5.62% | ||||||
Minimum regulatory capital requirement and distribution of equity value for a representative insurer. Equity Capital Requirement (ECR) is the market value of a loan of par value 5 euros (4.7 euros) less the market value of funding raised by issuance of contingent (insurance) contracts on four observable economic events (4.45 euros).
