the orsa process: where do i start this circle? a ... · times and are sufficient to achieve its...

The ORSA process: where

do I start this circle?

A practical ORSA applicationJaco van der Merwe & Maree Lambrechts

11 August 2014

Introduction 3

The ORSA process 5

Considering business as usual 8

The ideal ORSA process 26

Conclusion 29

Contents

2 © 2014 Deloitte Touche Tohmatsu Limited

A practical application of the ORSA in a South African environment:

• Moving away from the theoretical to the practical

• Practical elements of having a sufficiently rigorous ORSA in place

• Case study: Insurer X

• Finding the ORSA ‘efficient frontier’

• Potential further ORSA developments in the business

Introduction

What do we want to achieve today?


The ORSA Process

The ORSA process in South Africa

• Current available regulatory guidance & principles

• Output requirements of the ORSA process

• How the ORSA assists me in running a best practice ST insurer

− Why complicate my current systems further?

− Where is my efficient frontier?

• Ok, so how do we meet these requirements practically?

The ORSA process

Overview


“The ORSA is the entirety of processes and procedures employed to identify,

assess, monitor, manage & report the short and long term risks...to determine

the own funds necessary to ensure that...overall solvency needs are met at all

times and are sufficient to achieve its business strategy”

The ORSA process

Common ORSA structures/themes


Considering current

business as usual

The current ERM frameworkCurrent industry risk management capabilities


Risk Management ORSA Control Functions

Strong

Acceptable

Needs Improvement

Weak

45%

46%

9%

51%

14%

2%

33%

51%

6%

43%

1%

16% 57%54%

Introducing Insurer X


Overview

• Short term insurer in South Africa

• Only participates in local market

• Established for almost 10 years now

• Broker-based business

• Risk management capabilities have only been developed

recently

• CRO position has been filled for 1.5 years now

• No existing ORSA process in place

• Financial year-end is 30 June



Current ERM capabilities

• Business strategy in place for the next

5 years, reviewed annually

• No clearly articulated risk strategy

• High level risk appetite in place, no

clear risk limits

• Risk identification & assessment

processes are pretty basic

• Stress testing not explicitly part of risk

processes

• Capital assessment based on

Standard Formula

• No current risk projections


BusinessStrategy

Risk Strategy

Risk Appetite

RiskIdentification

RiskAssessment

Stress TestingCapital

Assessment

SolvencyProjections

ComplianceMonitoring

Governance

ORSA in thebusiness


ORSA strategy

• Objective is an efficient, practical & implementable ORSA that adds value

• ORSA structure/themes definition is starting point

• Identification of development areas

• Panel-beat these to fit regulatory guidance & principles

• Finalise processes to meet regulatory compliance by end of 2014

• Management training end 2014

• Finalise ORSA Record & Report structure by 1st quarter 2015

• Final management training 1st quarter 2015

• Operational optimisation during 2nd quarter 2015

• Annual ORSA in 3rd quarter 2015


The current ERM framework

Taking a calendar view


Core structures

Audit & Risk Committees

Investment Committee

Board

Core processes

Quarterly risk reporting

Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite

Identification & Assessment

Stress Testing

Capital Assessment

Solvency Projections

Governance

ORSA in the business

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

???

Consolidating Insurer X’s

ERM Framework


Taking a calendar view


Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance



Process outputs ► into ORSA Record

ORSA outputs ► into core processes

The ORSA Record


Business Strategy


Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance



• Business Strategy set over 5 years

• Strategy doesn’t incorporate risk budgeting

• Business Strategy currently orphaned from risk

management structure and processes in place

Current Situation


Business Strategy


Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance



• Business Strategy set over 5 years

• Strategy doesn’t incorporate risk budgeting

• Business Strategy currently orphaned from risk

management structure and processes in place

Current Situation

• Business Strategy to be incorporated into risk

processes & vice versa

• ORSA Report to contain short overview of current

business strategy, incorporation of risk assessment

Process Adjustments


Risk Strategy & Appetite


Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance



• No clearly articulated Risk Strategy

• High level Risk Appetite statement in place

• No clear risk metrics captured in risk appetite

• Risk Appetite statement is static

• No clear, regular review process in place

Current Situation


Risk Strategy & Appetite


Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance



• Need to clearly articulate Risk Strategy

• Risk appetite needs clear risk metrics in place

• Need to ensure risk framework is projected over the

business planning horizon

• Rigorous review process put in place

Process Adjustments

The current ERM frameworkRisk Identification & Assessment


Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance


• Basic Risk Identification processes

• Basic Risk Assessment processes

• Quarterly reporting on risk to Risk Committee

Current Situation


The current ERM frameworkRisk Identification & Assessment


Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance



• No major adjustments necessary

• Proportional risk identification & assessment

procedures

• Ensure individual risk policies in place

• Ensure above policies clearly articulate the

identification and assessment processes in place

Process Adjustments


Stress Testing


Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance



• No explicit process in place for stress testing and

scenario analysis

• Business planning doesn’t incorporate stress

testing

• Regulatory capital & economic capital models in

place

Current Situation


Stress Testing


Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance



• Need explicit stress testing & scenario analysis

policy

• Need to develop policy into framework, embed in

decision-making

• Document results clearly

• Establish roles & responsibilities to ensure

accountability

Process Adjustments

The current ERM frameworkCapital Assessment & Solvency

Projections


Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance


• Regulatory capital based on standard formula

• Simple economic capital model in place

• No projection of risk exposures

• No consideration of risk as part of business strategy

Current Situation




Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance



• Incorporate capital & solvency assessments into

strategic planning process

• Incorporate areas of business that will influence

future capital position, e.g. reinsurance renewals,

rating renewals

• Ensure stress testing is done on capital & solvency

projections

• Conduct own funds analysis as part of strategic

planning process

Process Adjustments

Capital Assessment & Solvency

Projections


Governance


Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance


• Board Risk Committee in place

• Quarterly Risk Reporting

• Risk escalation processes in place

• Chief Risk Officer in place

Current Situation



Governance


Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance



• No explicit adjustments required to governance

process

• Clearly articulate governance process in ORSA

Report

Process Adjustments




Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance



• No feedback of ORSA results currently into

business

• Decision-making doesn’t incorporate ORSA

results

• Strategic planning process doesn’t incorporate

ORSA results

Current Situation




Core structures



Board

Core processes


Actuarial valuation

Reinsurance renewal

Rating reviews

Strategic planning

The ORSA Process

Business Strategy

Risk Strategy

Risk Appetite


Stress Testing

Capital Assessment


Governance



• Ensure clear feedback mechanism from ORSA

report creation into decision-making processes

• ORSA results should feed into all Board

meetings

• ORSA results should feed into all Risk

Committee meetings

Process Adjustments


Compliance conclusion – ok so what now?

• Current ORSA process in place

• Independent validation

• Board & Senior Management Training

• Documentation structure

• Which areas are subject to further development?


“The world is getting to be such a dangerous

place, a man is lucky to get out of it alive.”

W.C. Fields

The ideal ORSA process


Structure overview

• Regulatory compliance has been

addressed

• Entirety of risk management

processes and procedures are

sufficient in the eyes of the

regulator

• What about internal view?

• Where does this process fit into

our competitive advantage

• Which areas are subject to further

development?


Business Strategy

Risk Strategy

Risk Appetite

Risk Identification

Risk Assessment

Stress TestingCapital Assessment

SolvencyProjections

ComplianceMonitoring

Governance

ORSA in thebusiness

Insurer X FSB


The “efficient frontier”


Various Considerations:

• Business nature

• Size

• Scale

• Resources

• Where will processes

add further value?

????

Conclusion

The ORSA process in South Africa

• Many of the building blocks already in place

• Leveraging these will facilitate initial implementation of ORSA

• All ORSA requirements will however likely not be met by current processes

• Continuous road to ERM improvement, ORSA principles light this road

Conclusion

The ORSA Process


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Jaco van der Merwe

Director FASSA FFA

Deloitte & Touche

Actuarial & Insurance Solutions

[email protected]

Maree Lambrechts

Actuarial Analyst

Deloitte & Touche

Actuarial & Insurance Solutions

Questions?

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