ERM Implementation and the Own Risk and Solvency Assessment (ORSA)

Transcription

1 ERM Implementation and the Own Risk and Solvency Assessment (ORSA) Kevin Olberding June Agenda ERM IMPLEMENTATION AND THE OWN RISK AND SOLVENCY ASSESSMENT (ORSA) Evolution of Enterprise Risk Management ERM Implementation Own Risk and Solvency Assessment (ORSA) ERM Framework Putting it into practice How ORSA fits into the ERM framework 2 1

2 Evolution of ERM ERM IS AN EVOLUTION, AIMED AT BEING FULLY LINKED WITH CORPORATE STRATEGY Link with strategy High Med Risk management Risk/return optimization via risk measurement Value creation with strategic integration & return optimization Loss minimization & balance sheet protection Low Compliance & risk control 3 ERM Implementation KEY ASPECTS OF A SOUND ERM PROGRAM Current ERM key initiatives what components make up good enterprise risk management program? Drive a risk aware culture Formal risk appetite statement Principles based capital modeling Robust stress and scenario testing program Risk based decision making Forward looking solvency assessment ORSA combines all of these main initiatives Represents an effective ERM program More than just a compliance exercise Main driver of ERM program implementation and development Highlights how to determine the capital required to maintain solvency now and in the future, under many conditions Should be viewed as an ongoing process The ORSA Summary Report and supporting documentation will be required in

3 Own Risk and Solvency Assessment (ORSA) ORSA SUMMARY REPORT OVERVIEW 1 ERM Framework & Assessment Enterprise risk management is a continuous process and includes strong risk culture and governance structure, adherence to risk appetite and associated limits, ongoing identification, assessment and measurement of risks, management, monitoring and reporting, a strong link with capital management and increasing influence in business planning. 2 Risk exposure assessment Assessment of material risk exposure via capital modeling and stress and scenario testing (SST) for risks that are more quantifiable in nature, and through more qualitative analysis for risks that are less quantifiable (such as many operational risks). Risk exposure assessment leads to greater understanding, action planning and informing key decision making. 3 Group Risk Capital and Prospective Solvency Assessment Group wide assessment of capital adequacy. Focus on the integration of capital management into the decision making process. Prospective view of solvency and capital adequacy over plan horizon under both normal and stressed conditions. 5 Own Risk and Solvency Assessment (ORSA) BENEFITS OF THE ORSA PROCESS ARE ABUNDANT The ORSA provides a significant amount of additional information relative to current RBC requirements Will challenge and improve ERM frameworks while continuing to advance risk culture and awareness Gain an increased understanding of risk exposures leading to improved capital allocation Creates momentum behind improving risk and capital modeling capabilities Formalized routine and actionable stress and scenario testing program The documenting process alone will lead to improvements A result of the ORSA process is to comprehensively link risk and capital management and business strategy and planning, which should dramatically improve risk and capital input into business decisions 6 3

4 CULTURE AND GOVERNANCE Key principles shown in pinwheel support a sound risk management function Continuous process A strong risk culture is integral to the success of an ERM program Key practices that enable a strong risk culture include: Sound risk management is viewed as a priority of the Board the importance of tone at the top The culture is underpinned by the company s values, ethics and compliance A risk aware culture is embedded into all people processes Hiring, development, performance management and incentive compensation practices reflect risk considerations ERM Framework ERM is an evolving and ongoing process, aimed at being fully integrated with corporate strategy, value creation and return optimization 7 RISK APPETITE The risk appetite policy is a foundational document that describes the types of risks and amount of exposure a company is willing to take in pursuit of their goals, and sets boundaries for risk taking activities A formal risk appetite statement with clear risk tolerances and limits is the foundation of a good risk management program Ensures the Board and management have a mutual understanding of strategy and acceptance of risk in pursuit of that strategy Highlights the risks to which a company is willing or not willing to be exposed Provides a vital link between risk management and the business strategy Risk dashboard commonly accompanies the risk appetite policy Should be reassessed after significant events and reviewed by the Board at least annually 8 4

5 IDENTIFY AND ASSESS RISKS Risk identification and assessment is a key ongoing process and should cover all major risks. Clear ownership of risk categories is also important. Examples of Enterprise Risk Management function activities include: Assist the Board and Senior Management in performing risk reviews Identify risks the insurer faces including assessing the capacity to absorb risk Evaluate the internal and external risk environment on an on-going basis Consider risks arising from remuneration arrangements and incentive structures Conduct regular stress testing and scenario analysis Maintain an aggregated view of the insurer s risk profile and report regularly Document the risk framework and report material changes Facilitate ownership of risk prioritization with business units Conduct regular assessments of the risk management system Credit Assets Reinsurance Market Equity Interest FX Risk Categories - ILLUSTRATIVE Liquidity Operational Strategic Claims Life Insurance Mortality Longevity Morbidity Annuities Policyholder behavior Guarantees Health Insurance A&H Morbidity Expense P&C Insurance Accident & Health Liability Motor Property 9 Risk Exposure Assessment (ORSA Section 2) CAPITAL MODELING AND STRESS AND SCENARIO TESTING (SST) Capital Modeling Both quantitative and qualitative risk measurement techniques can be used to assess risk Quantitative models are becoming more principles based in nature, such as economic capital Qualitative likelihood and severity analysis can be performed to assess operational risks Modeling tools can also be helpful in the evaluation of risk and risk management strategies Stress and Scenario Testing Multiple types of testing: single factor stress tests, scenario tests (combination of factors and/or years), reverse stress testing Stresses/scenarios generally represent plausibly bad, repeat of historical events, ad hoc requests, 1-in-20, 1-in-200, etc. Uses of stress and scenario testing include better understanding of risk exposures, to inform action plans (pre-emptive and contingent) and decision making, and to inform capital planning and management Model risk management and validation 10 5

6 RISK MANAGEMENT, MONITORING & REPORTING Management actions can be taken to prevent, reduce or transfer risks outside chosen tolerances Traditional risk management activities (e.g., hedging, reinsurance, securitization) Risk monitoring and reporting should occur at all levels within the organization, and on both regular cycles and on an exception basis Risk reports should inform key stakeholders about risk management processes, risk limits and breaches Recipients of risk reports include the Board of Directors, regulatory and rating agencies, and public reporting (e.g., 10K reporting) Enterprise risk reports typically strive to: 1.Identify material risk exposures (e.g. low interest rates, unemployment trends) 2.Report against risk appetite tolerances and limits 3.Assess capital adequacy relative to known risks 4.Identify emerging risks (e.g. regulatory and economic) 11 Group Risk Capital & Prospective Solvency Assessment (ORSA Section 3) CAPITAL MANAGEMENT Main goal of ORSA is to obtain a group risk capital view: Supplements the existing legal entity view Assesses capital fungibility Prospective solvency assessment should: Provide a capital forecast tied to the company s business plan Demonstrate sufficient financial resources necessary to execute the business plan in accordance with stated risk appetite Assess the effect of relevant and foreseeable changes to internal operations and the external business environment (stress and scenario testing) Describe management actions that will or could be taken to remediate, if needed A series of stressed environments should be reflected, along with their effect on required and actual capital levels. For each stress test or scenario, a discussion of the effect of the stress test or scenario should follow along with actions available to manage capital levels back to desired levels. 12 6

7 Group Risk Capital & Prospective Solvency Assessment (ORSA Section 3) LINK TO BUSINESS STRATEGY The pinwheel indicates a continuous process whereby the regular activities of ERM (identification, measurement, reporting, etc.) feed back into capital management, link to business strategy, and subsequently and continuously shape risk appetite. The link between risk, capital and strategy could be thought of as an optimization exercise, suggesting more involvement from risk management in considering risks during development of corporate strategy and business planning. The ORSA requirement is aimed at highlighting the link between risk and capital management and business planning. Multiple year dynamic planning is key Risks Use Test Risks create value Capital backs risks Business Capital Value from business provides return on capital 13 Key take-aways Support from the Board is critical Tone at the top No ERM programs are the same culture and management help determine the structure. ERM and the ORSA should be tailored to the company s unique risk profile and strategy Nature, scale and complexity of the business ERM is an ongoing process and best practices continue to evolve Focus on both quantitative and qualitative risk analysis Risk awareness, culture and integration across the organization are key ERM and ORSA considerations should be embedded in the business planning process Important to highlight the successes value creation 14 7