Estimation of Available Capital under ORSA

Bogie Ozdemir

Available capital is the first of the three components of ORSA that need to be developed for capital adequacy assessment:

$$\frac{Availablecapital(ORSA\text{-}based)}{\text{Required}\text{capital}\text{(Risk}\text{capital)}}\ge \text{Target}\text{surplus}\text{capital}\text{ratio}$$

Available capital under the regulatory framework is prescribed, with inclusions and exclusions explicitly specified. Under ORSA, available capital is self-defined with proper economic justification. This needs to be carried out under both going concern and gone concern states. Under the going concern state, the firm cannot be in default on any of its debt obligations. Consequently, the available capital can include equity or equity-like forms of capital that are subordinated to debtholders’ liabilities. Under gone concern, the firm is in default on its debt obligations, and the primary objective is to protect the policyholders. Therefore, the available capital can also include debt (in addition to the equity) that is subordinated to policyholders’ liabilities. It is also justifiable to include the stress value of certain assets for which no explicit risk capital is held. In this chapter, we will discuss estimation of available