Economic Capital Models

Economic capital models are tools used by businesses, particularly in finance and insurance, to assess the amount of capital needed to cover potential losses and ensure stability. These models estimate the risks a company faces, such as market fluctuations or operational failures, and determine how much money should be reserved to absorb these risks. By quantifying risk in this way, organizations can make informed decisions about investments, lending, and pricing, while maintaining a buffer that protects against unexpected events, ultimately aiding in long-term planning and financial health.