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Role of actuarial function supporting the FLAOR leading to the ORSA
Ian MorrisJune 2014
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Contents
• ORSA requirements
• Insurance Rule 31
• The Forward Looking Assessment of Own Risks
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3
Introduction to BWCI
• Established in 1979• Independent Partnership• 100 staff (in Guernsey and Jersey)• 15 qualified actuaries• Specialist insurance team• Clients in a range of jurisdictions• Guernsey, Jersey, Malta, Gibraltar, UK,
Mauritius etc
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Own Risk and Solvency Assessment• Article 45 of Solvency II directive
• Part of risk management system
• Not a capital requirement
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Key Aims
• Assess overall solvency needs• Specific risk profile• Approved risk tolerance limits• Business strategy
• Continuous compliance with solvency requirements
• How different from standard risk profile?
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Solvency Assessment
• Processes in place proportional to nature, scale and complexity of entity
• Properly identify and assess short and long term risks
• Demonstrate methods used
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ORSA
• Integral part of business strategy
• Used for strategic decisions
• Updated regularly and for significant change in risk profile
• Results reported to regulator
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Role of Actuarial Function in ORSA
• Contribute to effectiveness of risk modelling
• Work highly dependent on nature and scale of entity
• …but this is just the minimum requirement
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How can risk modelling be effective?• Integrate all aspects of risk assessment
• Understand how the business sets risk appetite
• Model should reflect approach to business
• Not just doing projections
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ORSA for large entity
• Likely to be based on detailed model
• Possibly an internal model
• Would require extensive work and documentation
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Actuarial challenges
• Technical challenge to model a large (and potentially complex business)
• Not easy to ensure model is robust
• How to communicate results to Board in a way that ORSA is integral to business strategy?
• Need to convince a regulator that model is appropriate
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ORSA for a small entity
• How much work is needed?
• Will resources be available?
• What level of proportionality is appropriate?
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Actuarial challenges
• Undertake enough work to be satisfied that the risk modelling is valid
• Simplifications likely to be needed but whose judgement?
• How will regulators judge proportionality?
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Insurance Rule 31
• Implementation of latest EIOPA Guidelines in Malta
• Governance• FLAOR• Submission of Information• Pre-application of Internal Models
• Effective 1 January 2014
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Coverage
• EIOPA requires entities covering 80% of market share to be included
• In practice most entities likely to need to comply
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Forward Looking Assessment of Own Risks
• Proportional• Own risk management• Nature, scale and complexity
• Role of Board• Should steer process• Challenge results
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Process
• Documentation needed includes• Policy for assessment• Record of each assessment• Internal report• Supervisory report
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Policy
• Description of processes and procedures• Consideration of risk profile, risk tolerance
limits and solvency needs• Information on• How and how often stress tests, sensitivity etc• Data quality• Frequency (with rationale)• Timing (and circumstances that would change this)
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Reporting
• Appropriate evidence and documentation• Internal report (to all relevant staff) • Supervisory report to include• Qualitative and quantitative results• Methods and assumptions• Comparison of solvency needs, regulatory
capital and own funds
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Specific guidance
• Use standard basis or justify alternatives• Express quantitatively and qualitatively• Adequate range of stress and sensitivity tests
• Forward looking (medium or long term)• Regulatory capital• Comply on continuous basis• Potential changes in risk• Impact of asset changes
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Technical Provisions
• Seek advice from actuarial function• Continuous compliance with requirements on
calculation of technical provisions• Identify risks from uncertainties relating to this
calculation• Assess whether risk profile deviates from
standard model
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Strategy
• Take into account results and insights
• Capital management
• Business planning
• Product development and design
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Role of actuarial function
• If limited to minimum level in the guidance will this be enough to prepare for ORSA?
• What will regulators expect?
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Wider view needed (in my opinion)
• Look at elements required
• Consider actuarial aspects• Direct issues impacting on technical
provisions• Other issues which have potential impact for
risk modelling
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Actuary should consider
• Approach to risk management• Understood• Reasonable• Proportional
• Nature • Scale• Complexity
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Documentation
• Is this adequate?
• Would actuarial view help?
• What reports should actuarial function produce (or comment on)?
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Policy
• Should be able to add value in many areas
• Risk profile• Risk tolerance• Stress tests• Sensitivity • Data
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Reporting
• Actuarial function should be able to bring rigor and technical expertise to reports
• Value to board
• Value to regulator
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Benefits of wider view
• Actuarial function should have deeper understanding of risk and modelling
• Sounder basis for advice
• More comfort to regulator
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Problems with wider view approach• Will adequate resources be available to
allow actuarial function this depth of involvement?
• Do we have all the skills needed?
• Communication challenge to• Establish resources• Provide response that shows value from
involvement
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?Questions?