4. Solvency II – Own Risk and Solvency Assessment (ORSA)

Insurance and Reinsurance Stakeholder Group meeting

12 December 2011

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Solvency II - ORSA

• Development process of EIOPA guidelines on ORSA

• General frameworko objectives and meanso details on the ORSA requirements

• Towards a formal opinion from the Insurance and Reinsurance Stakeholder Group

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Development process of EIOPA guidelines on ORSA

2008:

CEIOPS Consultation Paper on ORSA

January-March 2011:

Pre-consultation on draft guidelines

June 2011:

Pre-consultation stakeholders

meeting

November 2011 –

20 January 2012:

Public consultation

Discussion with Insurance and Reinsurance

Stakeholder Group

IRSG to provide formal opinion by

20 January

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General framework

• Solvency II Directive contains high-level principles Recital 36 => important background information on ORSA

Art. 36 => ORSA will be reviewed by supervisor

Art. 45 => principles for the ORSA

Art. 246 => group ORSA

• No Delegated Act details expected

• Guidelines from EIOPA to specify the expectations

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Objectives of ORSA in Solvency II

ORSA is a tool to improve the risk management of EU (re)insurers by

•promoting a better understanding of the company’s overall solvency needs

•disclosing sufficient and clear information on a company’s risk profile

•enhancing the board responsibility not to take on more risks than the capital base is allowing.

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It all starts from the top …

Capital base

Share holder

Share holder

Share holder

Elected board

Owners

Selection of representatives

Capital for running the company e.g. mitigating risks

Day-to-day operation Organisation

It is a core responsibility of the board not to take on more risks than the capital base is allowing

It is a core responsibility of the board not to take on more risks than the capital base is allowing

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… and forms an integral part of the business strategy …

By written procedures

Board of directors

Day to day business

Implementation Reporting Control Audit Commentary

What are the requirements corresponding to the risk appetite of the supervisory body?

The requirements reflect how important the individual elements are.

Employees need to be “fit” to execute their tasks Employees need to be “fit” to execute their tasks

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… by asking the right questions….

Identifying risks

Impact on SCR?

Process steps B: ”What are the risks that this company might face during the strategic planning period (e.g. 3-5 years)?”

E: Delivers an overall picture of the risks pronounced in quantitative figures and qualitative terms

B: Decision on which risks are mitigated by capital and which are mitigated by management actions only (e.g. reputational risk)

E:

B: Asks to quantify risks and develop suitable management actions for non-capital covered risksE: Quantifies risk by use of the organisation and develops suitable management actions

B: “How robust is the assessment of risks? What is the quality of key processes involved (e.g. claims handling)?

E: Conducts sensitivity analyses and calculates impact on capital needs

B: “What are possible future scenarios that we will have to navigate and what is the likely impact?”E: Conducts undertaking specific stress tests and calculates impact on capital needs as well as

developing suitable management actions

B: “What external stresses have not been taking into account already?”E: Conducts external stresses, some of which might be contained in the SCR-calculation, and

calculates impact on capital needs as well as developing suitable management actions

B ꞊ Board of directorsE ꞊ Executive team (by use of the organisation)

B: “Is the resulting understanding of risks and assumptions reflected in the basis (assumptions, structure, model) for the standard SCR-calculation or internal model, respectively

E: Evaluates impact and modifies SCR-calculation if needed

B: “What are the key assumptions underlying going concern?”E: Identifies key assumptions

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… and finding the right solutions…

Identifying risks

Impact on SCR?

Risk picture

Management actions for future scenarios:

Overall solvency needs

“Proof” of SCR-calculation

• Expressed in quantitative and qualitative terms

• Connects business planning to overall solvency needs

• Explicit identification of possible future scenarios

• Managing external stress• Assess quality of processes and

input

Develop risk awareness and contingency planning on a regular basis

Others

• Review assumptions for SCR-calculation

• Review risk picture in SCR-calculation

Meet with capitaland with mgt.

actions

Impact on strategy

• Review assumptions for business model

• Review control and governance

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… for “solo” undertakings and groups.

• Scope of the group ORSA: o Includes third country undertakings, regulated non-EEA and

non-regulated undertakings

• Overall solvency needs of the group:o Covers all group-specific risks and interdependencies taking

into account the specificities of the groupo Key drivers of diversification

• Group ORSA report: o Language of the Group RSR, in case of single possibility to

rquire translation of solo parts for solo supervisors o For single ORSA report: explanation on how subsidiaries are

covered and board has been involved in group ORSA

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To conclude: ORSA in a nutshell

•ORSA is a risk management process owned by the board which changes the viewing angle from bottom-up to top-down and connects business strategy and capital planning.

o Two main goals: The board should know that the company can “afford” its strategic plan 3-5 years ahead including bumps on the way and the board should know how to execute its strategic plan

o Introducing ORSA is a demanding task for the board

•There is no fixed recipe for an ORSA

•ORSA is not an internal model, nor a capital add-on

•ORSA is an integral part of the business strategy and needs to be performed at least annually, has to be performed whenever the risk profile changes significantly, has to be documented and has to be reported internally and to the supervisor

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Towards a formal opinion of the IRSG: areas of attention

Style

Question 1 Are the guidelines and recommendations clear and will they help the undertaking understand what they are expected to achieve under the requirements of the Solvency II Directive?

Content

Question 2 Are there any other areas in the scope of Articles 45 and 246 of the Directive where guidelines and recommendations would be useful?

Question 3 Are there any practical or operational issues with the application process which can be identified by undertakings? If so, how could they be addressed?

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Areas for discussion with the IRSG

Impact Question 4 Do you agree with the analysis of the costs and benefits for the implementation of the guidelines and recommendations? Are there other costs and negative impacts EIOPA should consider? What benefits may flow from the proposed guidelines and recommendations?

For example, what would be the potential impact of ORSA on the pricing, design and availability of insurance products, the corresponding effects for consumers and the wider social or economic impacts even if indirectly?

•Other?

Thank you!Thank you!