Own Risk Solvency Assessment
(ORSA)
2013 ASNY Annual Meeting
Josh Windsor, NAIC
Mark Yu, General Re-New England Asset Management
Today’s ORSA discussion is presented by:
Josh Windsor
Mr. Windsor recently joined the national Association of
Insurance Commissioners (“NAIC”) after nearly 20
years insurance related experience. He is a member of
the NAIC’s financial regulatory affairs international and
market surveillance unit where he will work on a variety
of national and international projects.
He was previously associated with a consulting firm that
serves regulators with a variety of projects including risk
focused examination of insurance companies, risk
assessment and capital requirements for various
insurance entities.
Josh is a Fellow of the Society of Actuaries, Fellow of
the Institute and Faculty of Actuaries, a member of the
American Academy of Actuaries and the Secretary of
the Actuarial Society of New York.
Mark M. Yu
Mr. Yu joined GR-NEAM in 2012 as an Enterprise Risk
Management professional focusing on the capital
management and corporate development activities for Life
insurance companies.
Prior to joining GR-NEAM, Mr. Yu was a senior risk
manager within the Governance and Strategy team at AIG
Enterprise Risk Management. Prior to working at AIG ERM,
he was a Senior Vice President and Treasury Director
within the Group Capital Management division of Swiss Re.
Mr. Yu holds a B.A. from National Tsing Hua University in
Taiwan and a M.S. from the University of Iowa.
He is a Fellow of the Society of Actuaries, a CFA charter
holder, a Financial Risk Manager, and a Member of the
American Academy of Actuaries.
The views presented by the speakers are as individual
professionals and are not the opinion of their employers
or of the Actuarial Society of New York.
2
Table of Contents
A. ORSA OVERVIEW
B. ASSET RISK EVALUATION – METHODOLOGY &
APPROACH
C. ASSET RISK EVALUATION – SAMPLE ANALYTICS AND
REPORTING
D. Parting Remarks
3
Own Risk and Solvency
Assessment Overview (ORSA)
What is ORSA?
 It is an own-risk review with the following key questions:
 What is our strategy?
 What level of risk are we willing to assume in pursuit of this
strategy?
 What are the key risks that could hinder our ability to achieve our
strategy?
 How much capital do we need to cover those key risks?
 What risks – individually or collectively- would subject us to losses
that exceed our tolerance?
 What risk scenarios would cause us to fail or stop operating as a
going concern?
5
ORSA - Key Points
 Building a bridge between risks, capital needs and available
capital. [Note the distinction between capital needs and
RBC requirements]
 Elevated risk awareness
 Improve risk governance processes and techniques
 Evolving by nature (business mix, environment factors, best
practices)
 ORSA will lead insurer management teams to be much
more deliberate and explicit in how they identify measure
and manage enterprise risks
6
ORSA - Key Points (Cont’d)
 A robust ORSA addresses current and prospective
risk in five key categories:





Underwriting
Credit
Market
Operational
Liquidity
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Solvency Modernization Initiative
NAIC Own Risk and Solvency Assessment
Background
•
Solvency Modernization Initiative (SMI)
adopted by the NAIC in 2008 to respond
to financial crisis and international
regulatory solvency developments
•
Risk Management and Own Risk and
Solvency Assessment (ORSA) Model Act
adopted in September 2012 with
effective date of January 2015
•
ORSA Guidance Manual to provide
guidance regarding the reporting of
insurer’s own risk and solvency
assessment
•
ORSA not required for Individual
insurers with annual gross premium
(“AGP”)< $500 million and/or Insurance
groups with AGP of less < $1000 million
Capital Requirements
Governance &
Risk Management
Solvency
Modernization
Initiative
Group Supervision
Statutory Accounting
& Financial Reporting
Reinsurance
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Timeline



The NAIC launched the Solvency Modernization Initiative (SMI), a critical “self-examination” to update the
U.S. insurance solvency regulation framework.
No fundamental revision of the regulatory capital formula (called Risk Based Capital) but only revision to
include CAT and Operational Risk. Also introduction on Principle Based Reserving for life companies.
Two new formats of statutory reporting have already been approved by the NAIC as part of the SMI:
•
Form F Enterprise Risk Report (ERR) – in effect from 2013 in some states (see article in the Fall
2013 Examiner magazine).
•
ORSA Summary Report – in effect from 2015.
ORSA and Form F
Timeline
NAIC ORSA
Guidance Manual
Nov. 2011
ORSA Model Act
adopted on
Sept 12, 2012
NAIC ORSA Model Act
proposed effective date
Jan. 1, 2015
2nd ORSA Pilot
1st ORSA Pilot
(June-July 2012) (May-Sept 2013)
2010
2011
2012
2013
2014
2015
First Form F reporting for some
states (July 1, 2013)
NAIC 2010 Model Law
(Form F on ERR)
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The main building blocks of the NAIC ORSA
Implementing the NAIC ORSA can be structured around segmented building blocks, each with its own
principles. The following represents an illustrative building block model that has been developed for ORSA.
Section 1
Section 2
Risk management
framework
Assessment of
Risk Exposures
Risk culture and
governance
structures
Risk identification
and categorization
Quantitative
risk assessment /
economic capital
modelling
Board of Directors
oversight
Risk prioritization
and assessment tools
Qualitative
risk assessment
Risk policies,
procedures, and
programs
Risk monitoring
methods
and controls
Stress testing
methodologies and
documentation
Risk appetite,
tolerances and limits
Risk reporting and
communication
Model validation and
calibration
Evaluation and feedback loop
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Section 3
Group risk capital and
prospective solvency
assessment
Group risk capital
adequacy
determination,
approaches and
assessment
Integrating capital
management into
decision-making (“Use
Test”)
Capital forecasting and
prospective
solvency assessment
Own Risk and Solvency Assessment
Overview
ORSA’s Two Key Requirements:
The ORSA is a process
The ORSA report is a regulatory filing
• ORSA is an insurer’s own process for
assessing its risk profile and the capital
required to support its business plans
in normal and stressed environments
on a forward-looking basis
• On an annual basis, insurers will be
required to provide a regulatory filing
that explains their ORSA process and
results
• The filing does not have a prescribed
format but should at the present time
contain 3 sections: 1) description of
ERM framework; 2) assessment of risk
exposures; and 3) group risk capital
and prospective solvency assessment
• The Guidance Manual requires
insurers/insurance groups to carry out
this risk and solvency assessment
process on a regular basis
► NAIC ORSA involves a self-assessment of the insurer’s risk management
framework and solvency position
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NAIC Own Risk and Solvency Assessment
Filing Requirements (1/3)
1. Description of ERM Framework
•
High level summary of key ERM
elements
•
Identification and assessment of
relevant and material risks for
executed business strategy
•
Documentation of assessment tools
•
Description of accounting basis and
legal entity structure
•
Definition of critical risk management
policies and procedures
Source: North America CRO council presentation
12
Typical Enterprise Risks
(not consistent with Official ORSA Guidance)
13
NAIC Own Risk and Solvency Assessment
Filing Requirements (2/3)
2. Assessment of Risk Exposures
Market Risk
•
Relevant and material risks
• Qualitative vs. Quantitative
• Normal vs. Stressed scenarios
• Tolerance and limits
• …….
•
Both quantitative and qualitative
assessments
•
Under normal and stressed
environments
•
Model validation, calibration and
assumption setting process
•
Methodology and approach
•
Multiple perspectives including
regulatory, economic and rating agency,
etc
•
Tolerances and limits setting process
Credit Risk
Insurance Risk
Operational Risk
…..
14
NAIC Own Risk and Solvency Assessment
Filing Requirements (3/3)
3. Group Risk Capital and Prospective Solvency Assessment
Normal Environment
Stressed Environment
•
Group level “available” capital versus
“risk” capital evaluation
•
Intra-group transactions, debt leverage
and diversification benefits
•
One to three years forward-looking
solvency assessment
•
Link business strategy and capital
actions to prospective assessment
•
Different tolerances at different
confidence levels under different
valuation bases
Risk Tolerance
Time
15
NAIC Own Risk and Solvency Assessment
ORSA vs. Statutory Risk-Based Capital (RBC)
US Statutory RBC (Ongoing)
NAIC ORSA (1/1/2015*)
Focus
Factor based and meant to identify
weakly capitalized companies
Emphasize process and both
qualitative and quantitative
Perspective
Backward looking; historical data
based
Forward looking with stressed
scenarios considerations
Considerations
No consideration of business plan
and strategy
Incorporate business plan and
corporate capital actions
Entities
All regulated insurance entity
Subject to minimal gross premium
threshold
Approach
Prescriptive; factor based
Non-prescriptive; own &
discretionary
View
Individual legal entity view
Aggregated group level approach
Capital
Requirement
Specific thresholds for regulatory
actions triggers
None but meant to address “target”
capitalization level
*Filing date: states might set a filing date; the NAIC has discussed allowing companies to submit around their business processes, but some states
might require these to be submitted once a year at a particular time
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Recent Developments
 As of August 5, 2013, five States have adopted
Model Reg 505: RI, IA, NH, ME and VT. It is
under active consideration in 8 more (see map
following).
 The American Academy of Actuaries has a
working party that is preparing a model ORSA
report for regulators.
 Another (2013) round of ORSA testing by the
NAIC.
17
Recent Developments (Cont.)
18
Deficiencies in the 2012 ORSA Pilot Study
addressed by the NAIC (Absent Items)
 Reports did not always specify the accounting
approach used (e.g., GAAP, SAP, IFRS)
 The organizational and legal structures were not
always clearly explained
 A comparison of material changes over time
 A comparative look back for three years
 Legal entity mapping
 Glossary of terms used by the company
19
Deficiencies in the 2012 ORSA Testing by the
NAIC (Absent Items Cont.)
 Detailed explanation of the company’s risk limits,
including key risks and materiality
 Combined stress test scenarios in addition to the
single stress tests
 Descriptions and explanations of tables and
graphs
 Details on capital model calculations
 Risk owner assignment
20
Deficiencies in the 2012 ORSA Testing by the
NAIC (Absent Items Cont.)
 Compensation and incentive linkage to risk,
including how this is determined by the company
 Heat maps of risks
 Graphical comparison of different capital models
if mentioned or used
 Executive summary
 Stronger, more detailed prospective risk sections
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Asset Risk Evaluation –
Methodology and Approach
Prudent Model Assumption:
Normal vs. Asymmetric
The world is usually not normal
• Assumptions of normality translate into misleading results
• It is essential to maintain a broad understanding of the risk characteristics of the portfolio
• Risk analysis and evaluation should capture and understand the impact of asymmetry on a portfolio’s
risk / return profile
*
Asymmetric, Non-Normal Returns
VaR / T-VaR
Prospective
Returns & Vols
Enterprise Decision
0.02
*4P = four parameters, where normal skewness = 0.0; normal tail = 2.0
23
Source: GR-NEAM Analytics
Identify
Model
Consequences
Tail Risk Evaluation:
Multiple Approaches with Various Implications
Downside Risk Metrics
VaR Value-at-Risk
T-VaR Tail Value-at-Risk
• Maximum Loss Not Exceeded With
a Certain Probability
• Expected Loss if Loss Event Occurs
End-of-Period
Intra-Period
“At any time within the period”
Measures may be
Expressed:
 At Multiple
Confidence
Intervals
 Multiple Periods:
Daily, Weekly,
Monthly,
Quarterly,
Annually
Statistical Distribution
Normal Market Conditions
Extreme Tail Risk
• Standard Normal,
• Diffusion Process,
• Levy with alpha-Stable
 As Portfolio or
Capital Loss
• Neglecting Extreme
• Allows For Jumps
 High Degree of
Customization
End-of-Period: SNEOP
Intra-Period: DIP
Methodology, Heavy Tailed
Market Movements
24
Source: GR-NEAM Analytics
Value-at-Risk and Tail Value-at-Risk :
Traditional Measures with an End-of-Period View
Portfolio Annual Returns
Value-at-Risk (VaR) Defined
The amount of loss not to be exceeded with a certain
probability in a given time frame; typically expressed
as a percent of capital
Tail Value-at-Risk (T-VaR) Defined
The expected amount of loss if the VaR loss threshold
is exceeded
Hypothetical 99.0 VAR ~ similar in concept to a 1-in-100 year event
Hypothetical 99.5 VAR ~ similar in concept to a 1-in-200 year event
Hypothetical 99.6 VAR ~ similar in concept to a 1-in-250 year event
25
Source: GR-NEAM Analytics
Intra-Period Losses May Be Significant And Require
Advanced Techniques To Avoid Pitfalls of Traditional
VaR & T-VaR Metrics
Portfolio Annual Returns
Intra-Period vs. End-of-Period
Traditional VaR/T-VaR methods underestimate
Intra-period VaR/T-VaR estimation approach
Intra-period downside risk by focusing on end-of-
reflects realistic downside risk. (E.g. -19.7%)
period return distributions Solely. (E.g. -1.6%
annual portfolio return)
26
Source: GR-NEAM Analytics
Asymmetric Measures Capture Extreme Events When Markets
Are Not Normal: Compare Annual T-VaR @ 6.1% vs. 13.8%
27
Source: GR-NEAM Analytics
Asset Risk Evaluation –
Sample Analytics and Reporting
Multi Portfolio VaR (T-VaR) Evaluation
Multi-portfolio, multi-currency, multi-time-period views with consideration of hedge effects
29
Source: GR-NEAM Analytics
Multi Portfolio VaR (T-VaR) Migration
What-if downside risk analysis under different market cycles, assumptions and approaches
30
Source: GR-NEAM Analytics
Incremental VaR (T-VaR) Analysis
Asset’s downside risk contribution within portfolio context; portfolio downside risk impact
from (proposed) changes in asset allocation
31
Source: GR-NEAM Analytics
VaR Risk Decomposition
Portfolio Risk Factor Decomposition
250
$19.9
99.5 VaR ($MM)
200
$27.4
$139.1
$45.8
150
$32.2
100
$93.7
50
$84.6
$36.9
0
Currency
Equity
Interest Rate
Structure
Credit
Implicit
Correlation Risk
Correlation
(Diversification)
Provides insight into portfolios’ downside risk drivers
Addresses regulatory / rating agency risk management expectations
32
Source: GR-NEAM Analytics
99.5 VaR
Asset Return Forecast – Benchmark Comparison
Prospective benchmarking and expected tracking error; Estimate potential prospective losses by
asset class or risk factor
33
Source: GR-NEAM Analytics
Stress Test: Historical Relevance
Compare and contrast statistical risk results with historical stress events outcome
34
Source: GR-NEAM Analytics
2012 Life Industry Asset Return vs. T-VaR Distribution
Asset TRR vs. 99.5% T-VaR (Excl. Affiliated Equities)
(Intersect @ Industry Median)
Annualized Total Return
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
0%
2%
4%
6%
8%
10%
12%
14%
99.5% T-VaR (Invested Assets)
35
Source: GR-NEAM Analytics
16%
18%
20%
Parting Remarks
Parting Remarks
(not NAIC advice)
1. Tail risk evaluations should address non-normal and
asymmetric characteristics
2. Intra-period evaluations are equally, if not more than
end-of-period results
3. What-if analysis and benchmarking offer valuable
insight for contemplated actions
4. Risk analytics and reporting need to provide actionable
information
5. Relating statistical results to historical scenarios adds
additional context and story
37
Today’s ORSA discussion was presented by:
Josh Windsor
Mr. Windsor recently joined the national Association of
Insurance Commissioners (“NAIC”) after nearly 20 years
insurance related experience. He is a member of the NAIC’s
financial regulatory affairs international and market
surveillance unit where he will work on a variety of
national and international projects.
Mark M. Yu
Mr. Yu joined GR-NEAM in 2012 as an Enterprise Risk
Management professional focusing on the capital
management and corporate development activities for Life
insurance companies.
Prior to joining GR-NEAM, Mr. Yu was a senior risk
manager within the Governance and Strategy team at AIG
Enterprise Risk Management. Prior to working at AIG ERM,
he was a Senior Vice President and Treasury Director
within the Group Capital Management division of Swiss Re.
Mr. Yu holds a B.A. from National Tsing Hua University in
Taiwan and a M.S. from the University of Iowa.
He was previously associated with a consulting firm that
serves regulators with a variety of projects including risk
focused examination of insurance companies, risk
assessment and capital requirements for various insurance
entities.
Josh is a Fellow of the Society of Actuaries, Fellow of the
Institute and Faculty of Actuaries a member of the
American Academy of Actuaries and the Secretary of the
Actuarial Society of New York.
JWindsor@naic.org
212 -398-9000
He is a Fellow of the Society of Actuaries, a CFA charter
holder, a Financial Risk Manager, and a Member of the
American Academy of Actuaries.
Mark.Yu@grneam.com
860-676-8722
The views presented by the speakers are as individual
professionals and are not the opinion of their employers
or of the Actuarial Society of New York.
38
Questions?
39