Own Risk & Solvency Assessment (ORSA): The heart of Risk & Capital Management

Own Risk & Solvency Assessment (ORSA):

The heart of Risk & Capital Management

John Spencer Director, Ultimate Risk Solutions

ORSA: the heart of Risk & Capital Management

1.ORSA: Definition & Scope

2.Strategy, Risk Sources & Risk Appetite

3.The ORSA in Practice

4.Deriving the Business Benefits

The ORSA defined The ORSA defined

■ Focus is on the process, not the outcome. How does it work? Who owns it and ensures continuous compliance?

■ Bringing the required expertise together in one coherent process. Identification of interdependencies is key.

■ A review of the firm’s compliance with the technical provisions and the regulatory capital requirements.

■ Projections of the balance sheet, capital requirements and own funds over the business planning horizon.

Coherent and robust process

Multi-disciplinary approach

The Past

The Future

■ Appropriate evidence for both internal and external stakeholders supervisors that the process is robust.

■ Tailored to the risk profile of the business in showing interrelationship between risks and solvency and establishing Solvency Capital Requirement (SCR)

Documentation

Proportionality

“The entirety of processes and procedures … to identify, assess, monitor, manage and report the short and long term risks [the Undertaking] faces or may face, and to determine the own funds necessary to ensure that the Undertaking’s overall solvency needs are met at all times”

Capturing the dynamics of the insurance business Capturing the dynamics of the insurance business

Economic Environment•Inflation indices, Bond yields, Stock indices, Exchange rates

AssetsAssets

Liabilities

Liabilities

Free CapitalFree

Capital

Company Strategies•Reinsurance design•Risk taking strategy•Asset allocation•Capital structure•Diversification

Insurance Risk•Attritional loss•Large individual loss•Catastrophic event loss•Loss reserve variability•Pricing cycle

Investment Risk•Treasury / Municipal bonds•Corporate bonds•Equities•Real Estate•Cash

Credit Risk•Bond defaults•Reinsurance receivables•Agency balances

Operational Risk•Outsourcing•IT failure•Fraud

Strategic Risk

Group Risk

Liquidity Risk•Asset-Liability mismatch

Defining the Risk Appetite Defining the Risk Appetite

An expression of the level of risk the firm is willing and able to accept in pursuit of its strategic objectives

Reporting and

decision making

Statements Measures

Limit Framework Governance

RISK APPETITE FRAMEWORK

Corporate Strategy: Corporate strategy outlines the goals

and strategies of the organisation.

2. Measures:

Quantitative and qualitative metrics which can be used to articulate the statement.

4. Governance:

States the roles and responsibilities of individuals charged with delivering risk appetite

1. Statements:

Translate the corporate strategy into explicit statements of risk

3. Limit Framework:

Determines the limits or thresholds against the measures

Linking Strategy and Risk Appetite Linking Strategy and Risk Appetite

CapitalManagement

RiskAppetite Strategy

Performance Management

Setting risk appetite

■ Benchmarking against peers

■ Assessing against rating agency models

■ Formulating risk appetite criteria, such as capital at risk.

Setting strategic direction

Business strategy:

■ Positioning relative to competitors

■ Product development

■ Geographic diversification.

■ Growth targets

Capital management:

■ Return on capital targets.

■ Allocation of capital between risk types

■ Fungibility of capital.

Managing the ORSA components Managing the ORSA components

Internal reporting and governance

Supervisory reporting and interaction

Independent review

1st Line Business Processes Forward looking assessment

Own view of capital

Stress and scenario testing

Business environment

Strategy

Business planning

Strategic planningFeedback

loop

Risk identification

Risk monitoring

Risk control

Risk reporting

Risk assessment

Technical provisions

Standard formula SCR

Internal model SCR

Business processes

Solvency monitoring

Identify areas of weaknesses in business processes supporting risk and capital

assessment

Determine internal view of capital requirements now and the future

New Management Information requirements New Management Information requirements

Be ForwardLooking includingstresses

and link these into one report

Firm

s w

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to u

nder

stan

d an

d re

port

on:

A new MI challenge for many firms

BusinessStrategy

Capitalneeds

Risk profileand tolerance

limits

ORSA will require firms to assess their overall solvency taking into account:

■ Business strategy

■ Risk profile and approved risktolerance limits

■ Capital needs

As well as future changes in the risk profile and capital needs considering extreme scenarios

The Solvency Risk Dashboard (extract)

Capital Modeling: Helping to build competitive advantage Capital Modeling: Helping to build competitive advantage

Continuous improvement

Optimisation

ORSA: Deriving the business benefits ORSA: Deriving the business benefits

Improve capitalallocation and maximizerisk adjusted returns

A consistent basisfor comparing

projects/strategies with

different risklikelihood/impacts

Increased consideration of Strategic Risk and Operational Risk

Better alignment of remuneration with risk-

based performance

Improved MI to facilitate better business decision-making

More streamlined and higher quality reporting through improved data integration

Improved product design & pricing

Optimize effectiveness and lower cost of risk

transfer

Giving all levels of management a deeper understanding of risks/opportunities

Enhanced transparency and appreciation of risk sources at Board level

Own Risk & Solvency Assessment (ORSA):

The heart of Risk & Capital Management

John Spencer Director, Ultimate Risk Solutions

Own Risk & Solvency Assessment (ORSA): The heart of Risk & Capital Management

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