Own Risk Solvency Assessment ORSA The heart of

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

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.

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 entirety of processes and procedures … to identify, assess, monitor,

The ORSA defined “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” Coherent and robust process Multidisciplinary approach The Past The Future Documentation Proportionality ■ 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. ■ 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)

ORSA: the heart of Risk & Capital Management 1. ORSA: Definition & Scope 2.

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 Economic Environment • Inflation indices, Bond yields,

Capturing the dynamics of the insurance business Economic Environment • Inflation indices, Bond yields, Stock indices, Exchange rates Strategic Risk Group Risk Investment Risk • Treasury / Municipal bonds • Corporate bonds • Equities • Real Estate • Cash Free Capital • Asset-Liability mismatch Operational Risk Assets Credit Risk Liquidity Risk Liabilities • Bond defaults • Reinsurance receivables • Agency balances • Outsourcing • IT failure • Fraud Insurance Risk Company Strategies • Reinsurance design • Risk taking strategy • Asset allocation • Capital structure • Diversification • Attritional loss • Large individual loss • Catastrophic event loss • Loss reserve variability • Pricing cycle

Defining the Risk Appetite An expression of the level of risk the firm is

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 Corporate Strategy: Corporate strategy outlines the goals and strategies of the organisation. 2. Measures: 1. Statements: Translate the corporate strategy into explicit statements of risk RISK APPETITE FRAMEWORK Measures Statements 3. Limit Framework: Determines the limits or thresholds against the measures Reporting and decision making Limit Framework Governance 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

Linking Strategy and Risk Appetite Setting risk appetite Setting strategic direction ■ Benchmarking against

Linking Strategy and Risk Appetite Setting risk appetite Setting strategic direction ■ Benchmarking against peers Business strategy: ■ Assessing against rating agency models ■ Formulating risk appetite criteria, such as capital at risk. Risk Appetite Strategy Capital Management ■ Positioning relative to competitors ■ Product development ■ Geographic diversification. ■ Growth targets Capital management: Performance Management ■ Return on capital targets. ■ Allocation of capital between risk types ■ Fungibility of capital. Performance Management ■ Embed risk appetite into business planning ■ Establish limits and triggers within boundaries, consistent with risk appetite. ■ Construct performance measures which include risk dimensions consistent with; – managing within risk appetite; – identifying changes to risks and emerging new risks.

ORSA: the heart of Risk & Capital Management 1. ORSA: Definition & Scope 2.

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 Forward looking assessment 1 st Line Business Processes Risk identification

Managing the ORSA components Forward looking assessment 1 st Line Business Processes Risk identification Business processes Risk monitoring Technical provisions Feedback loop Risk assessment Stress and scenario testing Risk control Risk reporting Solvency monitoring Business planning Strategy Identify areas of weaknesses in business processes supporting risk and capital assessment Internal reporting and governance Strategic planning Standard formula SCR Internal model SCR Independent review Own view of capital Business environment Determine internal view of capital requirements now and the future Supervisory reporting and interaction

on : New Management Information requirements da rst an de un to ed l

on : New Management Information requirements da rst an de un to ed l ne wil ms ort ep Fir er Be Forward Looking including stresses Risk profile Capital and tolerance needs limits on As well as future changes in the risk profile and capital needs considering extreme scenarios to ■ Capital needs in se ■ Risk profile and approved risk tolerance limits Business Strategy the ■ Business strategy nk nd d li an rep ort ORSA will require firms to assess their overall solvency taking into account: A new MI challenge for many firms

The Solvency Risk Dashboard (extract)

The Solvency Risk Dashboard (extract)

ORSA: the heart of Risk & Capital Management 1. ORSA: Definition & Scope 2.

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 Reinsurance purchasing Product design and pricing Optimisation

Capital Modeling: Helping to build competitive advantage Reinsurance purchasing Product design and pricing Optimisation Investment strategy Reserving approach Continuous improvement Portfolio optimisation M&A

ORSA: Deriving the business benefits A consistent basis for comparing projects/strategies with different risk

ORSA: Deriving the business benefits A consistent basis for comparing projects/strategies with different risk likelihood/impacts Improve capital allocation and maximize risk adjusted returns Enhanced transparency and appreciation of risk sources at Board level Increased consideration of Strategic Risk and Operational Risk Improved MI to facilitate better business decisionmaking Optimize effectiveness and lower cost of risk transfer Giving all levels of management a deeper understanding of risks/opportunities Better alignment of remuneration with riskbased performance Improved product design & pricing More streamlined and higher quality reporting through improved data integration

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

Own Risk & Solvency Assessment (ORSA): The heart of Risk & Capital Management John Spencer Director, Ultimate Risk Solutions