Own Risk and Solvency Assessment (ORSA)

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1 Questions addressed: The use of ORSA within the existing Risk environment How ORSA is impacting RISK Control? What are the key operational impacts? How ORSA will affect, benefit in Asia? Contact details Point of View Own Risk and Solvency Assessment (ORSA) Within the core of the Solvency II directive, the Own Risk and Solvency Assessment (ORSA) appears as a proven decision and analytic tool and a central element assesses to define the specific risk profile of the insurance company. Risk Management Strategies and ORSA are both a dedicated regulation by the NAIC from the USA Authorities. Core Principle 16 enacted by the IAIS is leading other jurisdictions to enact similar regulations. For further information please contact the authors: David Quirin Julien Sac Sia Partners 2014 Sia Partners Group. All rights reserved. 1. Context The quantitative capital requirements, included in the second pillar of Solvency II must be completed with requirements and a global / accurate risk management system. In addition to the mentioned requirements a full set of measures on governance, internal control and internal audit are established to secure all insurers. ORSA is is an internal assessment and analysis process that must be integrated in the strategic decision-making process. It constitutes a global and forward-looking approach of the overall risk management strategy. ORSA has been created to provide a group level vision on risk and capital as an addition to the existing legal entity view, as well as an appropriate level of ERM (Enterprise Risk Management), through which each insurer identifies, assesses, controls and reports on its material and relevant risks. ORSA is required to assess the adequacy of a firms risk management framework, and current/projected solvency positions. Risk assessments have to be prompt, easy to update and respect the principles of clarity openness and moderation within global requirements currently being developed November 2014

2 2. Regulatory measures ORSA is part of the wider Solvency II initiative that is the driving force for overall reform towards risk control and mitigation. It was first conceived in 2009 by the European Parliament and European Council. The ORSA is detailed in Article 45 of the Solvency II Directive. Solvency II was first conceived in 2009 by the European Parliament and European Council The high level aims of the Directive can be summarized as follows: the overall solvency of a firm needs to take into account the specific risk profile, approved risk tolerance limits and the business strategy of the Insurer. The compliance, on a continuous basis, with the capital requirements, and with the requirements regarding technical provisions. The significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement November 2014

3 3. Benefits Business Objective Increased chances of achieving business goals and targets Risk management Reduced the likelihood And severity of unexpected events or market conditions Business strategy Better decision making,planning and prioritisation Capital management More efficient use of Capital and resources that reflect the risks faced by the business ORSA Corporate governance Providing a framework that enables future activity to be undertaken in a controlled and consistent way Talent management Developing and supporting people and the organisation s knowledge base Business performance Optimising operational efficiency Reputation / Branding Protection of the company s brand and image 4. The different key components 03 - November 2014

4 5. Operational implementation Currently companies focus on the implementation of Pillar 1 of Solvency II, only once those are implemented will the priority switch to developing their ORSA. The operational implementation of ORSA for an insurance company can be divided in to 4 steps. These are: 1. Development of the risk profile 2. The implementation of a strategy for risk management 3. The evolution of strategic processes 4. Process of executing and collating the ORSA report 5.1 Risk profile The risk profile consists of grouping all of the risks that the company is subjected to, and the planned measures that will be required to mitigate against them. A risk mapping exercise should be performed, with the risks identified as part of Pillar 1 and with the addition of the insurance risks (liquidity risk, business risk, strategic risk, reputation risk...). 5.2 Four types of risks An Insurers risk appetite and risk profile should be coherent, clearly documented and communicated. Firms have four different options available to them to when deciding upon an appropriate course of action for each risk identified. These can be summarized as follows: 1. Reduction of risk 2. Transfer of risk 3. Abandonment of risk 4. Acceptance of risk The objective is to integrate the dimension of risk and solvency in the decision-making process, and all the aspects in terms of ALM must be reviewed. Processes should be monitored methodically to ensure that the limits are still within the threshold defined, and to ensure that all the events with major impacts are noticed and taken into account. 5.3 Risk management strategy Second step is the implementation of a risk management strategy via two key processes. : 1. Determining the strategic risk appetite of a firm: maximum amount and type of risks that a company is willing to accept. 2. Setting a Risk tolerance: the acceptable variance regarding a risk threshold, expressed as upper and lower limits, measured against a baseline November 2014

5 The implementation of a risk management strategy is a key element to guide and assist the Board, with the objective being to ensure that a proper risk assessment is performed in order to monitor the overall risk to the organization. It should also help to define and embed the risk culture of the company using a top down approach. From this the risk appetite and the risk tolerance should be defined and validated by the management of the company. An agreement on the limits or variation should be reached, and then the implementation into limits of operational risks should start. 5.4 ORSA report Key elements include the following: New reports required in Pillar 2 of the Solvency II, for regulators and public. Internal reports used fort the Board and those that work within the Risk Control function ORSA reporting contains: Description of the overall risk profile of the firm along with detailed individual drivers of risk and the risk management processes in place to provide sufficient governance to the overall process Description of the quantitative methodologies used in the context of the ORSA, results, defined strategy, and conclusions 6. Asia ORSA will be an important component of the risk management system for insurance companies. In their risk strategy, insurers will define the level of risk acceptability. Management must decide whether risk mitigation techniques such as risk transfer through reinsurance are appropriate, or whether it is possible to diversify the risks. That is why in Asia ORSA or similar tactical processes will be implemented. 6.1 ORSA development ORSA regimes are implemented or under development in all markets. ORSAs have been included in the International Association of Insurance Supervisors (IAIS ) list of Insurance Core Principles (ICPs). Regulators in Asia s markets are also planning changes to their risk measurement and management requirements. ORSA regimes are implemented or under development in all markets 05 - November 2014

6 6.2 State of Progress In Malaysia, the first ICAAPs have been done, and Bank Negara Malaysia (BNM - the central bank), has to propose new rules to company s processes and policies. Singapore s risk framework which first appeared in 2004 has evolved over the years. In 2012, the monetary authority of Singapore (MAS) issued a paper of the revised risk based capital regime. The MAS requires all licensed insurers to adopt ORSA in their ERM from January In China, the Insurance Regulatory Commission has a new solvency framework tht went live in May It comprises of three pillars: risk management, disclosure and capital requirements. The Australian Prudential Regulatory Authority (APRA) has finished reviewing their general insurance capital standards. In 2012, requirements for internal Capital Adequacy Assessments (icaaps) were in place, same approach than ORSA. There are other countries active in Asia also introducing similar measures, for example, Japan and South Korea, they are in the process of considering new regulations for insurance companies. Japan s financial services agency has, undertaken studies; which include the use of an ORSA type solution. In South Korea the Financial Supervisory Service (FSS) has been discussing the opportunity of including ORSA processes. In other markets, development is limited but when they will be more mature they will have to adopt such rules, so they need to think about it now November 2014

7 Related databases Solvency II Directive Risk management French Prudential Supervisory Authority Basel II References _ag38.htm from the International Association of Insurance Supervisors oc Contact the authors Julien SAC David QUIRIN About Sia Partners In less than 14 years, Sia Partners has become the leading independent consulting firm in France. The firm was cofounded in 1999 by Matthieu Courtecuisse who is now the majority shareholder accompanied by 14 international partners. Sia Partners boasts 500 consultants and an annual turnover of 75 million Euros. The Group has offices in 12 countries, including the US, its second biggest market, which contributes 10% of total turnover. Sia Partners is renowned for its sharp expertise in the Energy, Banking, Insurance, Telecoms and Transportation sectors November 2014