At the heart of the prudential Solvency II directive, has risk and solvency assessment (ORSA) is defined as a set of processes that are tools for decision-making and strategic analysis. It aims to assess, in a sustainable and prospective manner, the need for overall solvency related to the specific risk profile of the insurance company. Risk management and risk assessment and solvency are the same rules that have been enforced in the US by the NAIC. Other jurisdictions enact similar rules to comply with the Core Principle of Insurance 16 endorsed by IAIS.
Video Own risk and solvency assessment
Context
The second pillar of Solvency II plans to complement quantitative capital requirements with quality and precise global risk management system requirements. Reform provides steps in governance, internal control and internal auditing to ensure good and prudent management practices of insurance companies. Impacts in terms of risk and solvency should be incorporated into upstream strategic decisions. The process of internal risk assessment and solvency, known as ORSA, is at the core of this plan.
Operationally, ORSA is part of the global enterprise risk management process (ERM).
It is part of a cycle and iterative system involving boards of directors, senior management, internal audits, internal controls and all employees of the company. It aims to provide reasonable assurance about compliance with corporate strategy against risk.
ORSA is voluntarily defined broadly by regulations to encourage insurance companies to question themselves on the framework of internal systems dedicated to control and risk management. It should in all cases be concise, easy to renew and respect the principle of materiality and proportionality.
Maps Own risk and solvency assessment
Regulatory reference
Since 2003, the Solvency II regulation follows the Lamfalussy process, which differentiates 3 levels of action, from the big principles to the enforcement measures necessary for operational implementation. The ORSA regulatory update of the NAIC follows the Solvency Modernization Initiative aimed at updating the US regulatory system.
Solvency II
Level 1 measurement
Level 1 text is the rule base of reform. It was adopted in 2009 on the same text by the European Parliament and the Council of Europe.
ORSA is defined in Article 45 of the Directive.
Article 45 of the Solvency 2 directive framework (extract)
As part of the risk management system every insurance and reinsurance company must perform its own risk and solvency assessment.
The assessment should include at least the following:
(A) the overall solvency requirement taking into account the specific risk profile, the approved risk tolerance limit and the business strategy of the undertaking;
(B) compliance, on an ongoing basis, with capital requirements, and with requirements on technical provisions;
(C) the significance by which the risk profile of the business concerned deviates from the assumptions underlying the Solvency Capital Requirements.
Level 2 measurement
Level 2 steps are technical implementation steps to complement the principles defined in the text of level 1, given the operational execution requirements. Level 2 action should be adopted by the European Commission on proposals from EIOPA (European Insurance and Occupational Pension Authority). To advance the development of reforms, EIOPA consults with the market, including through Paper Consultation.
ORSA was not included in Level 2 and so in 2009, during extensive consultations on Level 2 measurements, none of the Consultation Papers were specifically intended for ORSA. However, a large number of them call it, for example:
Consultation paper No. 17 on the calculation of capital add-ons
Consultation paper No. 24 on the principle of proportionality
Consultation paper No. 33 about the system of government
Consultation paper No. 56 about internal model validation
... dll.
So if Level 2 does not specify requirements for ORSA, they can be used to better understand ORSA interactions with other requirements and clarify the role of ORSA in the Solvency II insurance system.
Level 3 measurement
Step 3 will be directly adopted by EIOPA. They generally correspond to non-binding recommendations. Since the creation of EIOPA in January 2011, its responsibilities, however, are extended to the production of Level 3 binding steps.
ORSA is below level 3 text. For this purpose, a consultation paper was published on 7 November 2011.
This consultation paper presents a series of instructions for ORSA:
- General considerations: the importance of the principle of proportionality, the key roles played by administrative, management and oversight bodies, documentation for ORSA and the principles that oversee ORSA governance;
- Justification and communication for the ORSA process;
- Specific features regarding the application of ORSA:
- Assessment of overall solvency needs: a sustainable approach should be justified, must be quantitative and qualitative, should include a sufficient number of stress tests and scenarios and should include prospective dimensions;
- ORSA must include information provided by the actuarial function on the validation of technical provisions;
- ORSA results should be integrated into all strategic management processes;
- ORSA frequencies: at least annually, and should be adjusted for the risk profile volatility of insurance companies
- ORSA group species
This text is still in consultation, but can anticipate the impact of Level 3 measures on ORSA.
NAIC ORSA regulation
While the High Level Risk Management and Own Risk and Solvency Assessment Model Act (# 505) have been adopted by NAIC in September 2012, the NSAIC's ORSA Guidelines Guidelines are being revised in early 2013.
The State legislative process is still ongoing, but we can anticipate the regulation to be fully enforced by 2015. South Africa: Assessment and Solvency Management (SAM) ORSA Rules South Africa: >
Similar to Solvency II, Insurers and Reinsurers registered in South Africa will be required from 1 April 2017 to conduct regular ORSAs. ORSA requirements in South Africa will meet IAIS standards. Regular reporting will also be required to the Clerk of the Insurer.
Operational implementation
Insurance companies are in the process of preparing their Solvency II plan and generally, the setting of pillar 1 has been prioritized. Therefore the ORSA plan is still immature in the market.
However, it seems that four key steps can be identified in ORSA's operational implementation:
- Definition of risk profile
- Implementation of strategies for risk management
- Evolution of strategic processes
- Production of ORSA reports
In the US, companies are at various stages of ORSA preparedness.
Definition of risk profile
The risk profile encompasses all risks facing the company, quantification of this exposure and all protective measures against those risks.
The risk profile differs from the regulatory capital specified under Pillar 1. This takes into account the specificity of each insurance company, it integrates all material risks, in a prospective view, and ORSA leaves open the solvency definition or risk aggregation methodology.
In practice, the definition of risk profile will be enhanced by the realization of mapping of all risks, including risks identified as part of pillar 1 of Solvency II reform - underwriting risks, market risk, counterparty default risk, operational risk, intangible asset risk - but also other risks specific to each insurance company - liquidity risk, business risk, strategic risk, reputation risk, etc.
Once the mapping is complete, the metric should be defined to measure risk. Companies can use what is done on pillar 1 such as the size of risk, time period and/or different level of security that best suits its strategy for risk control.
Implementation of risk management strategy
Once the risk profile is established, the administrative, management and supervisory bodies must establish a corporate risk management strategy through the following elements:
- Appetite risk
- Risk tolerance
Risk appetite is the maximum aggregate risk level that companies want to take. Risk tolerance represents the limit on acceptable performance variations associated with different risk factors.
One of the key roles of the risk management function is to support administrative, management and supervisory bodies in order for them to comment on this strategy. Risk management functions not only must convey the information needed to operate, but also provide the key to risk-taking culture and critical analysis of these elements by leaders.
Finally, the risk limit is the operational implementation of risk tolerance. The risk management function should coordinate trade to determine:
- How this limitation of risk should be disclosed;
- The methodology for translating appetite and tolerance limits operational risk.
Evolution of the strategic process
All decisions made in the company's daily management must respect the established strategy. To keep risk profiles to a level consistent with risk appetite, leaders have four key strategies:
- Negligence of risk ;;
- Risk reduction;
- Risk transfer;
- Risk acceptance.
The main strategic processes of insurance companies, such as the definition of trade policies, reinsurance and asset liability management, should be revised to integrate the dimensions of risk and solvency in the decision-making process.
In addition, ORSA should enable ongoing compliance with regulatory requirements in terms of own funds. To that end, the insurer must establish a series of systematic processes to monitor and control continuous compliance with risk limits and identify major events - internal or external - that have a significant impact on risk profiles and lead to ORSA reforms.
ORSA report
ORSA is the subject of several reporting requirements:
- ORSA is integrated into the narrative of the new report required in Pillar 3 reforms, both intended for supervisors and the public;
- ORSA should be a series of internal reporting, especially during the strategic process that should be provided;
- As part of a Level 3 action designed by EIOPA, ORSA must be a special report, the ORSA report, which is tied to administrative, management and oversight bodies.
Generally, reporting in ORSA will contain two parts:
- Qualitative report: Description of the risk profile and risk management process available;
- Quantitative report: A description of the quantitative methodology used in the ORSA context, outcomes, defined strategies, and conclusions.
The US ORSA report will contain three parts, as described in the ORSA Guide Manual:
- Description of the insurance risk management framework
- Risk exposure risk assessor
- Group risk capital and prospective solvency assessment
See also
Related articles
- Solvency II Guide
- Risk management
- French Prudential Supervisory Authority
- Basel II
References
External links
- Official European EIOPA website
- Solvency II Guidelines 2009/138/EC
- EIOPA: Level 3 measure Ã,: - CP 008/2011 - Solvency II: Consultation Paper Regarding Proposals for Guidelines for Risk Assessment and Solvency
- Consultation Paper on the EIOPA website
- Presentation in ORSA ORSA - Solvency II Heart - EIOPA - 2011
- NAIC ORSA Working Group [1]
Source of the article : Wikipedia
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