EY - The ORSA opportunity: from compliance to business value

The ORSA opportunity:

Compliance and business value

15 October 2013

The ORSA opportunity: compliance and business value

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Today’s presenters

Chad Runchey Ernst & Young LLP

Bill Spinard Ernst & Young LLP

Moderator:

James Collingwood Ernst & Young LLP

Presenters:

Adam Walter Ernst & Young LLP



Today’s agenda

► Background and regulatory update

► ORSA overview

► Industry perspectives

► Achieving long-term business value

#EY_ORSA Join today’s Twitter discussion:


Fact check

What industry or industries do you focus on?

A. Property casualty

B. Life

C. Health

D. Other


Today’s agenda


► ORSA overview




Background and regulatory update

Own Risk and Solvency Assessment (ORSA) per the US NAIC*

► Definition

► “an internal assessment… conducted by [the] insurer of the material and

relevant risks associated with an insurer’s current business plan and the

sufficiency of capital resources to support those risks”

► Primary goals

► To foster an effective level of enterprise risk management at all insurers

through which each insurer identifies, assesses, monitors and reports on

its material and relevant risks, using techniques that are appropriate to the

nature, scale and complexity of the insurer’s risks, in a manner that is

adequate to support risk and capital decisions

► To provide a group-level perspective on risk and capital, as a supplement

to the existing legal entity view

► Other jurisdictions with an ORSA process include

► Bermuda, the European Union and Canada


* National Association of Insurance Commissioners

Background and regulatory update

► ORSA Summary Report – highlights

► Section 1: Description of Insurer’s Risk Management Framework

► Section 2: Insurer’s Assessment of Risk Exposure

► Section 3: Group Risk Capital and Prospective Solvency Assessment

► ORSA Summary Report – expectations

► Annual reports due starting in 2015

► Exemption criteria for smaller insurers/groups

► No specified report date, NAIC states it will be dependent on when ORSA

is performed

► Can utilize ORSA reports prepared for other jurisdictions

► Should facilitate a more in-depth review by the regulator through analysis

and examination processes

► Horizon for key risks and capital adequacy should align with business plan

(e.g., 1-3 years)


Background and regulatory update State adoption

► To date, the Risk Management and ORSA Model Act has been fully or

substantially adopted by:

► Iowa

► Maine

► New Hampshire

► Rhode Island

► Vermont

► California

► The Risk Management and ORSA Model Act was considered by

legislatures in other states in 2013 (CT, OH, PA, TX, VA, WY)

► The NAIC has advocated for full and uniform adoption of the model

act by states during the 2013-14 legislative sessions



Fact check

How would you assess the current state of

readiness at your company?

A. Ready for regulatory submission

B. Have all of the capabilities – just need to put the

report together

C. Understand the gaps and have a plan to close them

D. Understand the requirements and potential gaps

E. Unclear on requirements or state of readiness

F. Does not apply (EY, faculty, alumni, other)


Today’s agenda


► ORSA overview




ORSA overview ORSA requirements

Description Considerations

Co

mp

on

en

ts

Section 1:

Description of

risk management

framework

• Risk culture and governance

• Risk identification and prioritization

• Risk appetite, tolerance and limits

• Risk management and controls

• Risk reporting and communication

• Identify assessment tools used to

monitor and respond to changes in

risk profile

• Explain how new risk information

is incorporated

Section 2:

Assessment of risk

exposures

• Documentation of quantitative measurements of risk

exposure in both normal and stressed environments

• Quantification of risk exposure under a range of

outcomes using risk measurement techniques that

are appropriate to the nature, scale and complexity

of the risks

• Detailed descriptions and explanations of the risks

identified and quantitative methods used

• Risk quantification method is prescribed;

should be consistent with way in which

business in managed

• Impact of stresses on capital; consider

risk capital requirements, available

capital, regulatory, economic, rating

agency or other views of capital

• Demonstrate process for model

validation, including factors considered

and model calibration

Section 3:

Group risk capital

and prospective

solvency

assessment

• Documentation of the combining of qualitative and

quantitative elements of risk management policy

• Determination of the level of financial resources

needed to manage current business for the next

2-5 years

• Completion of an annual group risk capital

assessment, complete with a description of the

approach used to conduct the analysis

• Discussion of how risk and capital interrelate over

various time horizons and the interplay between

group risk and other capital frameworks (e.g. rating

agency and regulatory)

• Capital adequacy assessment process

integrated into management and decision

making culture

• Projection of future financial position

should include economic and regulatory

capital given current risk profile,

management policy, quality and level of

capital, considering normal and stressed

scenarios


Cre

dit

Mark

et

Liq

uid

ity

Opera

tio

nal

Legal/

Com

plia

nce

Reputa

tio

nal

Insura

nce

ORSA overview ORSA requirements map to an ERM framework

Risk identification

• Covers all types of risks

• Identifying emerging

risks

Risk assessment and

measurement

• Single version of truth

• Reflects risks presented

Risk monitoring and

management

• “Industrialized”

production of risk

analysis

Risk reporting and management information

• Information to drive business decisions

• Clear, concise and reflective of current status

Data, IT, infrastructure

• Integration of risk and finance systems architecture

• Data to be consistent, complete, accurate and auditable

Policies, standards, internal controls, people and culture

• Clear ownership of tasks and activities

• Consistent policies and standards

• Robust internal controls

Overall governance

arrangements

• Strategy and risk appetite

• Oversight arrangements

Decision and planning support

• Technical pricing and value contribution is core input to product design

• Metrics to identify underperforming portfolios

US ORSA Report

Section 1: Description

of the Insurer’s Risk

Management

Framework

US ORSA Report

Section 2:

Insurer’s Assessment

of Risk Exposures

US ORSA Report

Section 3:

Group Risk Capital

and Prospective

Solvency Assessment



Fact check

What section of the ORSA requirements is the most

challenging for your organization?

A. Section 1 – ERM fundamentals

B. Section 1 – Risk appetite

C. Section 2 – Assessment of risk exposure

D. Section 3 – Group risk capital

E. Section 3 – Prospective solvency assessment

F. Does not apply (EY, faculty, alumni, other)


Today’s agenda


► ORSA overview




Industry perspectives ORSA readiness

► Companies are at different levels of readiness

► In general – healthcare industry capabilities are behind life and property/casualty

► Companies with favorable ERM ratings from S&P likely have many capabilities in

place

► Several companies across life/health and property/casualty industries

participated in one or both pilots

► First pilot allowed incomplete submissions – many submitted partial ORSA reports

► Second pilot required more comprehensive ORSA report and participants indicated

comfort with their capabilities

No activity –

attending

webcast

Participated in

second pilot –

capabilities to

produce full report

ORSA working

group formed –

limited activity

ORSA/ERM gaps

identified, roadmaps

developed/under

development

Active projects to

close identified

capability gaps


Some companies use ORSA as the driver for ERM enhancements that drive

business value

Industry perspectives

► Key ORSA implementation questions for the insurance industry

► For an insurance group with multiple insurance legal entities or with

different types of business (e.g., both Life and P/C), should they prepare a

single or multiple ORSA reports?

► What will the final report look like, what information should be included

and what is an appropriate report length?

► How will all the information for the report, which will likely come from

multiple business units, be pulled together effectively and efficiently?

► If capital is viewed through multiple lenses/bases (e.g., RBC, economic

capital, rating agencies capital), should all of these be included in the

report?

► What other stakeholders (e.g., rating agencies, external auditors) will want

to receive a copy of the report?



Fact check

What measurement approach do you plan to use for

section 3 of the ORSA (the prospective solvency

assessment)?

A. Risk based capital

B. Rating agency capital

C. Existing economic capital approach

D. New economic capital approach

E. Does not apply (EY, faculty, alumni, other)


► Section 1 - much of the industry has put an ERM framework on paper

for the organization, but evidence of use and effectiveness remains

inconsistent

Industry perspective Common capability gaps Implementation challenges

► Most companies feel comfortable that current capabilities meet most of the requirements of Section 1 of the ORSA Guidance Manual

► Certain companies that have very immature ERM programs need to formalize their framework in place to cover all components

► Governance structures in the insurance industry are very different than other financial services companies

► Independent CRO reporting to CEO/Board

► Separate risk committee of the Board

► Risk appetite

► Strong risk culture

► Evidence of risk management’s role in key decisions

► Companies continue the struggle to directly link risk appetite and limits/tolerances across key risk types

► Definition of the risk appetite to incorporate quantitative measures requires the adoption of a consistent quantitative measure of risk

► Consistent implementation of ERM framework across the group – specifically different countries and industries (e.g. P&C vs. Life)



► Section 2 - calls for the quantitative and qualitative assessment of risk

exposures in normal and stressed conditions


► Current risk assessment is dependent on risk taxonomy

► In general, life companies are less focused on operational risk

► In general, P&C and Health companies are less focused on investment/market risk

► Companies that have moved towards an economic capital framework have a more mature quantitative approach in place

► Comprehensive risk inventory with quantitative and qualitative assessments

► Consistent metric across risk types

► Determining how to perform the assessment under “stressed” conditions when the metric may already be under a “stress” (e.g., economic capital may be defined as a 1 in 200 year stress)

► Building a more robust approach for both qualitative and quantitative assessment of broader range of operational risks

► Difficult due to lack of exposure data

► Even more quantitative approaches require significant approximations



► Section 3 - includes two complex components

► group risk capital calculation

► prospective solvency assessment


► Generally viewed as most complex component of ORSA Guidance Manual

► Was not typically part of a good ERM framework

► Flexibility provided by the Guidance Manual leaves many question unanswered

► Apprehension exists with regards to the ultimate use of this section by regulators

► Used to require additional capital?

► Used to compare companies?

► Complex groups typically don’t have a group risk capital calculation

► Capabilities to project future income statement and balance sheet under stressed conditions incorporating new business

► Capabilities to project future capital requirements – in particular under internally developed measurement framework

► Accounting differences across geographies and product lines increase difficulty in relying on existing frameworks

► Comprehensive views of future balance sheets under required accounting regime (Stat, GAAP, Economic)

► Approaches for calculating future required capital components for calculation intensive balances (e.g., future projections of stressed market value of liabilities)

► Incorporation of multiple capital frameworks to model future distributions of excess capital

► Reliable aggregation of financial statements across legal entities



Today’s agenda


► ORSA overview




Achieving long-term business value

► Link to ERM

► The flexibility around the ORSA report and Guidance Manual

minimize the “compliance” nature of the requirement

► ORSA compliance shouldn’t be a standalone item – but rather

a way to push ERM capabilities forward

► The ORSA Guidance Manual is looking to formalize and document

a robust ERM framework; the value to an organization comes from

the value of ERM

► The ORSA requirement should push an organization to use and

show evidence of their ERM program working when undertaking

complex decisions


Achieving long-term business value

► Value from a strong ERM program

► Improves focus on risk and further establishes the “tone at the top”

► Provides an independent challenge and review of key information,

assumptions and business practices, allowing the ability to

escalate issues

► Helps to improve decision making through increased rigor and

standard / structured processes, as well as the ability to understand

financial impact based on stress events

► Enhances collaboration with business units and leadership to

identify emerging risks, understand current plans to address and

focus on the future

► Improved executive level discussions about risk and strategic

decision making

► Enhances the external stakeholder (rating agencies, policyholders,

peer organizations) perspective of the organization resulting in

improved opportunities for growth



One-minute recap


Resources

► ey.com/us/insurance

► ORSA and ERM: Use

the upcoming compliance

deadline to boost existing

ERM practices

http://bit.ly/13lrRi5

► ORSA readiness:

The time is now (pdf)

http://bit.ly/14gLIxg

► Connect with us

► EY_Insurance


Contact us

James Collingwood

Ernst & Young LLP

Chad Runchey

Ernst & Young LLP

Bill Spinard

Ernst & Young LLP

Adam Walter

Ernst & Young LLP

+1 312 879 6306

[email protected]

+1 212 773 1015

[email protected]

+1 703 747 1070

[email protected]

+1 312 879 6031

[email protected]

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Transcript of EY - The ORSA opportunity: from compliance to business value