NAIC ORSA: A Practical Guide to the DOI s First Year Reviews

Transcription

1 ZZ NAIC ORSA: A Practical Guide to the DOI s First Year Reviews Eli Russo Sherry Flippo NAIC 2 Attention APIR, PIR, or SPIR Designees This presentation is pre-qualified for NAIC Designation Renewal Credits (DRCs). If you currently hold an NAIC APIR, PIR, or SPIR designation are pursuing continuing education credit to maintain it, you may be awarded credits for your participation. To receive credit, you must be in attendance for the duration of the presentation.

2 Learning Objectives 3 At the end of this presentation, you will be able to: Explain current status of NAIC ORSA initiatives first year s reviews by the state Departments Of Insurance (DOI) Describe the latest NAIC observations for each of the 3 sections of the ORSA based on actual reviews Identify some of the key questions that regulators should ask when reviewing the ORSA based on the case study of company ABC Current State ORSA Adoption 4 FL April 2016

3 5 Status Update on ORSA reviews ORSA Model Law to become an accreditation requirement on 1/1/18 Overall number of reports expected (after all state adoptions): 200 at group level 100 at single legal entity level (from groups below the ORSA threshold) Number of ORSA reports reviewed by NAIC in last 18 months: approx. 70 Bulk of 2015 reports were filed with state DOI in Q4: approx. 200 State DOIs are reviewing, documenting internally providing feedback to companies ORSA Subgroup under Group Solvency Issue (E) WG set up on Feb 10 th, 2016 NAIC ORSA training program for DOIs started in 2015 continues in NAIC s ORSA Observations- 6 Culture Prioritization Tolerance Controls

4 NAIC s ORSA Observations- 7 Tolerance Culture Controls Prioritization *No Business Strategy with description of the main business goals * No ORSA initiatives for next months NAIC s ORSA Observations- 8 Culture Prioritization Tolerance Controls *No information on compensation for key risk stakeholders *No risk owners

5 NAIC s ORSA Observations- 9 Culture Prioritization Tolerance Controls *Limited information on PROCESS for identification of key risks NAIC s ORSA Observations- 10 Culture Prioritization Tolerance Controls * No articulation of individual limits tolerances for key risks * No risk appetite at enterprise level

6 NAIC s ORSA Observations- Executive * Summary Limited description of Culture non-financial controls around key risks Prioritization 11 Tolerance Controls NAIC s ORSA Observations- 12 Tolerance Culture * No KRIs to track risk strategy Controls Prioritization

7 NAIC s ORSA Observations- Section 2 Exposure Quantitative Qualitative Assessment Normal (Expected) Environment *Not all key risks are assessed (so, how big is the risk?) Each Material Category *Explanation of why some key risks are not assessed: lack of data or methodology? Stressed Environment *Robust justification for the selection of stresses 13 NAIC s ORSA Observations- Section 3 Universe Universe 14 Key s (R1-R4) Prospective Assessment Key s (R1-R4) Time (0) Duration of business plan Time (T) Required Capital Available Capital Required Capital Available Capital Diversification 3 4 Available Capital Prospective Solvency Assessment Diversification 3 4 Available Capital

8 NAIC s ORSA Observations- Section 3 Universe Key s (R1-R4) Universe *No justification for risk capital metric Prospective Key s *Not all Key s (R1-R4) Assessment are quantified 15 Time (0) Required Capital Available Capital Duration of business * No plan explanation of Time (T) large diversification Required Capital benefit Available Capital Diversification 3 4 Available Capital Prospective Solvency Assessment *No prospective assessment Diversification 3 *No justification for selection of stresses 4 Available Capital * No validations of numbers Implement ORSA observations in the case study of company ABC 16 Company ABC A global P&C Insurer 20% of premium in WC 50% of premium in the US 60% equity Mostly selling through one broker Regulator s Questions (example) What is your business strategy? Grow worldwide CAT commercial Decrease earnings volatility Diversify geographically into developing countries Increase online sales

9 Implement ORSA observations in the case study of company ABC 17 Regulator s Questions (example) What is your process for identification of risks? Do you have limits around each key risk? What is the risk appetite at enterprise level? Do you consider geopolitical risk given your global expansion plans? What about cyber security for your online platforms? Key 1. CAT 2. Asset 3. WC Reserves 4. Underwriting (pricing) 5. Credit- reinsurer 6. Operational broker dependency Yes - per peril No more than 8% volatility in market value of assets Adverse reserve development in 1 year no more than 10% surplus yes yes 7. Emerging Implement ORSA observations in the case study of company ABC 18 Regulator s Questions (example) How big are risks 3 7? How do you assess whether the exposure is within the limits? How do you limit your WC exposure? How did you select your stresses? Were any of the limits breached? Key s Exposure Normal 1. CAT Yes - per peril Yes (1-100) depending on peril 2. Asset No more than 8% volatility is market value of assets 3. WC Reserve Adverse reserve development in 1 year no more than 10% surplus 4. Underwriting (pricing) 5. Creditreinsurer Market value of assets Exposure Stressed Yes (1-200) (1-1000) depending on peril 2008 Financial crisis Low interest rate (long-term) yes Sustained high loss ratio for new business yes Downgrade of top two reinsurers 6. Operational broker dependency Material reduction in brokerage sales 7. Emerging

10 Implement ORSA observations in the case study of company ABC Key Regulator s Questions (example): Economic Capital- Current (in USD bn) Economic Capital- Next year (in USD bn) 1. CAT How is economic capital defined? How is the metric selected fit for the risk profile? What if there is loss due to a cyber breach? What is the diversification benefit how is it calculated? Have you stressed your capital? 2. Asset WC Reserve Underwriting (pricing) 5. Credit- reinsurer 6. Operational- broker dependency 7. Emerging Economic Capital before diversification Economic Capital after diversification Available Capital Contact Information 20 Elisabetta (Eli) Russo erusso@naic.org (cell.) Sherry Flippo, CPA, FLMI sflippo@naic.org