Estimation of Risk (or Economic) Capital under ORSA (Part 2)

Bogie Ozdemir

Let us continue our exploration of risk capital. In the previous chapter, we described the theoretical underpinning and overall approach to estimating risk capital for different risk types. In this chapter, we turn our focus to risk capital estimation using advanced methodologies for complex products and risk capital aggregation.

The chapter will examine detailed methodologies for the complex risk types where advanced methodologies are emerging. Specifically, the first section covers some advanced methodologies for complex risk types, such as segregated funds with guaranteed payments (short put options) and ring-fenced products. This is followed by an investigation of intra-risk and inter-risk aggregation methodologies, before we conclude with a look at future improvements as risk capital methodologies become more advanced.

DETAILED ECONOMIC CAPITAL METHODOLOGY FOR SELECTED PRODUCTS

Advanced risk capital modelling with LSMC

A defining characteristic of ORSA is that it is “tailored to the insurer’s own risk profile and appetite, and reflective of the nature, scale and complexity of the insurer”. Specifically, “insurers are expected to use more sophisticated methods to