own risk & solvency assessment (orsa): the heart of risk & capital management john spencer...
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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”
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
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.
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
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
ill n
eed
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)
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
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