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 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. 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, 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 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
Quantitative and
qualitative metrics
which can be used to
articulate the
statement.
Governance
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 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. Strategy, Risk Sources & Risk Appetite
3. The ORSA in Practice
4. Deriving the Business Benefits
Managing the ORSA components
1st Line Business Processes
Forward looking assessment
Risk
identification
Business
processes
Risk
monitoring
Technical
provisions
Risk
assessment
Feedback
loop
Risk control
Risk reporting
Solvency
monitoring
Identify areas of weaknesses in business
processes supporting risk and capital
assessment
Independent
review
Own view of
capital
Strategic
planning
Standard
formula SCR
Internal
model SCR
Internal reporting and
governance
Stress and
scenario testing
Business
planning
Strategy
Business
environment
Determine internal view of capital
requirements now and the future
Supervisory reporting and
interaction
New Management Information requirements
ORSA will require firms to assess their
overall solvency taking into account:
■ Business strategy
Business
Strategy
■ Risk profile and approved risk
tolerance limits
■ Capital needs
As well as future changes in the risk
profile and capital needs considering
extreme scenarios
Be Forward
Looking
including
stresses
Risk profile
Capital
and tolerance
needs
limits
A new MI challenge for many firms
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
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
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 Spencer
Director, Ultimate Risk Solutions