Practical approaches to the
Own Risk and Solvency Assessment
Casualty Actuaries in Europe (CAE)
Spring meeting May 31st 2013
Caspar Richter, CEO, Actuary M.Sc.
Caspar.Richter@SolvencyTool.com
Agenda
Title: Practical approaches to ORSA
Duration: 50 minutes
Examples of tables of
contents
Brush up on legislation
Risk identification
Planning for the future
2
Stress test and
scenarios
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ORSA
A few questions
 How many have read the ORSA guidelines from EIOPA?
 How many have participated in doing an ORSA?
 How many have done it several years?
…I hope at least to give you some inspiration!
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ORSA
Initial thoughts
Personal statement
A personal point of view:
 Establish your governance system and risk management setup
 Get your processes and reporting for this up and running
 Now ORSA should be a short document summarizing all this at
the end of the year
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ORSA
Reporting structure
Example of contents
1. Executive summary
2. General setup
a) Company structure and ORSA approach
b) Strategy and business model (main products, distribution channels, growth plans etc.)
c) Risk identification and risk management
3. New and expired risks and incidents during the year
4. Own Risk and Solvency Assessment
a) Basic own funds and solvency capital requirement as at 31st Dec 2012
b) Stress tests and scenario analyses
c) Reverse stress tests
5. Performance of ORSA related processes during the year
a) Compliance with predefined risk limits
b) Compliance with other risk management setup
6. Expectations for the future (3-5 years)
a) Capital target
b) Capital and risk planning (projections of BOF, SCR and MCR)
c) Contingency planning
7. Conclusion and actions
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Agenda
Title: Practical approaches to ORSA
Duration left: 45 minutes
Examples of tables of
contents
Brush up on legislation
Risk identification
Planning for the future
6
Stress test and
scenarios
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Risk identification
Typically used to provide documentation for the risk management process.
Strengthens the forward-looking perspective
Typical process to update the risk register and get support for ORSA
Step 1
Identify
Step 2
Select
Step 3
Assess
Step 4
Approve
Bottom-up
Top-down
Bottom-up
Top-down
Risk owners identify
emerging risks and expired
risks
Risk owners evaluate risks
about to expire
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AMSB chooses important
risks for the company /
group
Risk owners assess the
important risks (qualitative
assessment and possible
quantitative as well)
Chief Risk Officer selects
final assessment of all risks
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AMSB approves important
risks and their assessment
Risk identification
Typically used to provide documentation about the risk management process.
Strengthens the forward-looking perspective
Some risk managers establish links for each risk to Solvency II model, organisation,
risk owners etc.
Risk register
In internal risk committees risk owner decide on a common understanding of the
risk matrix (likelihood and severity)
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Risk identification
Typically used to provide documentation about the risk management process.
Strengthens the forward-looking perspective
Discussion in risk committees can be very important to get the full picture
Basis: Risk identification spring 2012 (01-02-2012 - 28-02-2012) (Published)
Risk: Too many manual processes
Risk description: In the financial division there are several manual processes
without automatic and independent control. Control procedures should be
improved to minimize the risk of human errors.
CRO responsible
Risk owner
Risk owner
John Doe
Christian Armstrong
David Schulz
Likely
Unlikely
Possible
Small
Medium
Medium
Impact amount (Gross)
0
0
0
Impact amount (Net)
0
0
0
Medium
Medium
Medium
Responsible
Probability
Probability percent
Impact
Rating
Priority
Module for model
Operational
 Involve risk owners
 Listen to opinions
 Discuss aspects on
probability and severity
 Get consensus
 Reevaluate existing risks
 Identify emerging risks
Sub model
Risk accepted
Risk significant for board
Risk reduction necessary
Risk reduction implemented
Implementation date
Description of risk reduction action
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Risk identification
Typically used to provide documentation about the risk management process.
Strengthens the forward-looking perspective
Demonstrate that new risks are identified and necessary action is taken
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ORSA
Reporting structure
Example of contents
1. Executive summary
2. General setup
a) Company structure and ORSA approach
b) Strategy and business model (main products, distribution channels, growth plans etc.)
c) Risk identification and risk management
3. New and expired risks and incidents during the year
4. Own Risk and Solvency Assessment
a) Basic own funds and solvency capital requirement as at 31st Dec 2012
b) Stress tests and scenario analyses
c) Reverse stress tests
5. Performance of ORSA related processes during the year
a) Compliance with predefined risk limits
b) Compliance with other risk management setup
6. Expectations for the future (3-5 years)
a) Capital target
b) Capital and risk planning (projections of BOF, SCR and MCR)
c) Contingency planning
7. Conclusion and actions
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Agenda
Title: Practical approaches to ORSA
Duration left: 30 minutes
Examples of tables of
contents
Brush up on legislation
Risk identification
Planning for the future
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Stress test and
scenarios
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Stress test and scenarios
A short list of possibilities
Further explanations on slides to come
Example of approaches




Sensitivity of parameters or assumptions
Taylor series of the SCR
Historical incidents and losses
Use of market data
Stress tests
Scenarios as simple aggregation




 Combination 1 of stress tests
 Combination 2 of stress tests
 …
Stress test 1
Stress test 2
Stress test 3
…
What are the implications?
Or reverse stress testing
•
•
•
•
•
•
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BOF below capital target
BOF below SCR
BOF below MCR
What can cause insolvency?
Certain combinations?
Certain events?
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Stress test and scenarios
Sensitivity of parameters or assumptions
Simple lists
Risk
Event
Claim frequency increased
Loss = 10% of earned premiums
Run-off losses
Loss = 5% of tech. provisions
56 mEUR
Large losses
Loss = 3% of earned premiums
40 mEUR
Nat. CAT
Basis: Market loss of 1,338 mEUR
23 mEUR
…
Comments
•
•
•
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Involve AMSB in this
Take historical experience into consideration
Use partial internal model if relevant
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Impact
133 mEUR
Stress test and scenarios
Taylor series of the SCR
Simple explanation of changes
Level 1
Risk
BSCR
SCRop
Adj
SCR
Amount
1.531.652
100.000
-250
1.631.402
Factor
100,0%
100,0%
100,0%
Amount
150.001
100.000
500.000
1.300.000
25.000
-518.349
1.531.652
Factor
41,5%
60,6%
12,4%
37,3%
92,1%
100,0%
Solvency Capital Requirement:
𝑆𝐶𝑅 = 𝐵𝑆𝐶𝑅 + 𝑆𝐶𝑅𝑂𝑝 + 𝐴𝑑𝑗
Taylor series:
Changes in SCROp and Adj have 100% effect on SCR
Level 2
Risk
SCRmkt
SCRdef
SCRlife
SCRhealth
SCRnl
SCRint
Diversification
BSCR
SCRmkt
SCRdef
SCRlife
SCRhealth
SCRnl
100%
25%
25%
25%
25%
25%
100%
25%
25%
50%
25%
25%
100%
25%
0%
25%
25%
25%
100%
0%
25%
50%
0%
0%
100%
Basic Solvency Capital Requirement:
𝐵𝑆𝐶𝑅 =
𝑖,𝑗
𝐶𝑜𝑟𝑟𝑖 , 𝑗 × 𝑆𝐶𝑅𝑖 × 𝑆𝐶𝑅𝑗 + 𝑆𝐶𝑅𝐼𝑛𝑡
Taylor series:
𝐹𝑎𝑐𝑡𝑜𝑟𝑖 =
𝑗
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𝐶𝑜𝑟𝑟𝑖, 𝑗 × 𝑆𝐶𝑅𝑗
(𝐵𝑆𝐶𝑅 − 𝑆𝐶𝑅𝐼𝑛𝑡)
Stress test and scenarios
Taylor series of the SCR
Simple explanation of changes
Further remarks:




The SCR calculation is hierarchical
Factors are relative to a parent
Factors could be multiplied up through the modules
Thereby changes could be explained directly by e.g.
variations in claim provisions, premiums etc.
 And contributions are additive!
Example of use of Taylor series for market risk
Market risks
Interest
Equity
Q1 2013
Q2 2013
Change
%
Effect on SCR
68.687
52.215
-16.472
33%
-5.436
6.592
6.421
-172
9%
-15
Property
4.694
4.688
-6
22%
-1
Spread
37.169
34.323
-2.846
23%
-655
0
0
0
0%
0
13.506
14.218
711
16%
114
0
0
0
0%
Concentration
Currency
Counter-cyclical premium
Total
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0
-5.993
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Stress test and scenarios
Historical losses or near misses
Link them to the solvency II modules and risk identification
Results of SCR calculation should be compared with historical data
Loss identification
Loss identification spring 2012 (01-02-2012 - 28-02-2012) (Published)
CRO responsible
Loss
Loss description
John Doe
Mass accident
On a small commercial business there
w as an accident with a machine. 7
people w ere involved.
03-02-2011
800.000
John Doe
Industrial fire
Fire on a big pow erplant causing huge
property damage and loss of profit
claims.
14-06-2010
11.000.000
John Doe
Windstorm
There w as a minor w indstorm in 2010
causing losses across the country.
15-01-2010
7.500.000
Increase in thefts
The number of burglaries in private
homes have increased over the past
years and reached a maximum in
2009.
01-07-2009
6.000.000
Reinsurer bankrupt
Utopia Re w ent bankrupt and the
company had to clean cut a few
treaties.
01-02-2009
250.000
John Doe
Loss on equities
Financial crisis in 2008 / 2009 caused
a severe decrease in the value of
equities.
01-03-2009
8.000.000
John Doe
Loss on CDO's
Financial crisis in 2008 / 2009 caused
a severe decrease in the value of
CDO's.
01-03-2009
100.000
Date of loss
Estim ate of
total gross
loss
Was loss an
Description of loss reduction action Loss was
identified risk
reduced
Large claims
Reinsurance programme covered the
claim.
The loss w as covered by reinsurance.
Increased claim frequency
John Doe
Premiums increased
Reinsurers
John Doe
Assets losing value
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Limit in total amount of equities.
Change of investment guidelines.
No more uncommon investment types
w ill be used in the future.
ORSA
Reporting structure
Example of contents
1. Executive summary
2. General setup
a) Company structure and ORSA approach
b) Strategy and business model (main products, distribution channels, growth plans etc.)
c) Risk identification and risk management
3. New and expired risks and incidents during the year
4. Own Risk and Solvency Assessment
a) Basic own funds and solvency capital requirement as at 31st Dec 2012
b) Stress tests and scenario analyses
c) Reverse stress tests
5. Performance of ORSA related processes during the year
a) Compliance with predefined risk limits
b) Compliance with other risk management setup
6. Expectations for the future (3-5 years)
a) Capital target
b) Capital and risk planning (projections of BOF, SCR and MCR)
c) Contingency planning
7. Conclusion and actions
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Agenda
Title: Practical approaches to ORSA
Duration left: 15 minutes
Examples of tables of
contents
Brush up on legislation
Risk identification
Planning for the future
19
Stress test and
scenarios
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Planning for the future
Capital and risk planning
Contingency plans
Current year
Year + 1
Year + 2
Year + 3
Year + 4
BOF before
dividends
Dividends
Basic own funds
Capital target
SCR
Green SCR limit
Yellow SCR limit
Comments:
 A few examples of capital target:
 (1 + loading) * SCR
 SCR + buffer
 Factor * Earned premiums
 Capital target should reflect the risk appetite defined by
AMSB and the stress and scenario testing
 Projections could be made by simple scaling or by use of
expected development in most important risk drivers
Red SCR limit
MCR
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Year + 5
Planning for the future
Risk appetite from top level to bottom
Establish key risk indicators
Simple approach to risk appetite and key risk indicators
•
Risk appetite: Create 3 limits on top level
• Green, yellow and red limit for SCR
•
Apply limits for all modules by use of factor
• Simple way to construct indicators that
single risks are increasing more than
accepted
• Specific actions can be initiated if
respectively green, yellow or red limit
is exceeded
• Contingency plans are hereby made
concrete and far more practical on a
detailed level
Key risk indicator for each of the modules:
Green: Below low limit
Yellow: Between low and middle limit
Red: Between middle and high limit
Black: High limit is exceeded
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ORSA
Reporting structure
Example of contents
1. Executive summary
2. General setup
a) Company structure and ORSA approach
b) Strategy and business model (main products, distribution channels, growth plans etc.)
c) Risk identification and risk management
3. New and expired risks and incidents during the year
4. Own Risk and Solvency Assessment
a) Basic own funds and solvency capital requirement as at 31st Dec 2012
b) Stress tests and scenario analyses
c) Reverse stress tests
5. Performance of ORSA related processes during the year
a) Compliance with predefined risk limits
b) Compliance with other risk management setup
6. Expectations for the future (3-5 years)
a) Capital target
b) Capital and risk planning (projections of BOF, SCR and MCR)
c) Contingency planning
7. Conclusion and actions
22
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Agenda
Title: Practical approaches to ORSA
Duration left: 5 minutes
Examples of tables of
contents
Brush up on legislation
Risk identification
Planning for the future
23
Stress test and
scenarios
Copyright SolvencyTool
Brush up on legislation
EIOPA Final Report on Public Consultation No. 11/008
On the Proposal for Guidelines On Own Risk and Solvency Assessment
General considerations
• Guideline 1: Principle of proportionality
• Guideline 2: Role of the administrative, management or supervisory body
(top-down approach)
• Guideline 3: Documentation
–
–
–
–
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ORSA policy;
Record of each ORSA;
Internal report on ORSA; and
ORSA supervisory report.
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Brush up on legislation
EIOPA Final Report on Public Consultation No. 11/008
On the Proposal for Guidelines On Own Risk and Solvency Assessment
Observations
• Adapt ORSA according to the
complexity of your company
• Involve the senior management
and the board
• Secure audit trails and internal
procedures and write a report
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Brush up on legislation
EIOPA Final Report on Public Consultation No. 11/008
On the Proposal for Guidelines On Own Risk and Solvency Assessment
ORSA policy
• Guideline 4: ORSA policy includes at least
– a description of the processes and procedures in place to conduct the ORSA including
how the forward-looking perspective is addressed;
– consideration of the link between the risk profile, the approved risk tolerance limits and
the overall solvency needs;
– information on:
•
•
•
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(i) how stress tests, sensitivity analyses or reverse stress testing are to be performed and how often they are to
be performed;
(ii) data quality requirements; and
(iii) the frequency and timing for the performance of the (regular) ORSA and the circumstances which would
trigger the need for an ORSA outside the regular timescales.
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Brush up on legislation
EIOPA Final Report on Public Consultation No. 11/008
On the Proposal for Guidelines On Own Risk and Solvency Assessment
Observations
• Explain how ORSA is forwardlooking
• Risk tolerance limits should be
included
• Explain what triggers an ORSA
outside the regular timescale
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Brush up on legislation
EIOPA Final Report on Public Consultation No. 11/008
On the Proposal for Guidelines On Own Risk and Solvency Assessment
Record of ORSA
• Guideline 5: Appropriately evidenced and documented internally
Internal report
• Guideline 6: Make sure that relevant people receive information on ORSA
results
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Brush up on legislation
EIOPA Final Report on Public Consultation No. 11/008
On the Proposal for Guidelines On Own Risk and Solvency Assessment
Observations
• Remember to inform internally
about the results of ORSA
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Brush up on legislation
EIOPA Final Report on Public Consultation No. 11/008
On the Proposal for Guidelines On Own Risk and Solvency Assessment
Performance of ORSA
•
•
•
•
•
•
Guideline 7: Valuation and recognition
Guideline 8: Assessment of the overall solvency needs
Guideline 9: Forward-looking perspective
Guideline 10: Regulatory capital requirements
Guideline 11: Technical provisions
Guideline 12: Deviations from the assumptions underlying the SCR
calculation
• Guideline 13: Link to the strategic management process and decision
making framework
• Guideline 14: Frequency of ORSA
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Brush up on legislation
EIOPA Final Report on Public Consultation No. 11/008
On the Proposal for Guidelines On Own Risk and Solvency Assessment
Observations
• Consider how the overall
solvency needs should be
assessed
• Check for deviations from
assumptions underlying the SCR
• Be sure to link business strategy
and ORSA
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Brush up on legislation
EIOPA Final Report on Public Consultation No. 11/008
On the Proposal for Guidelines On Own Risk and Solvency Assessment
Group specificities of the ORSA
•
•
•
•
•
Guideline 15: Scope of the group ORSA
Guideline 16: Reporting to the supervisory authorities
Guideline 17: Assessment of overall solvency needs
Guideline 18: General rule for group ORSA
Guideline 19: Specific requirements for a single ORSA document covering
the participating insurance or reinsurance undertaking or the insurance
holding company and any subsidiary in the group
• Guideline 20: Internal model users
• Guideline 21: Integration of related third-country insurance and reinsurance undertakings
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Brush up on legislation
EIOPA Final Report on Public Consultation No. 11/008
On the Proposal for Guidelines On Own Risk and Solvency Assessment
Observations
• Consider if separate ORSA
reports should be written for
each company in the group or if
one could do the job
• Make sure to take into
consideration the actual ability to
move basic own funds from one
company to another in the group
• Use internal model results
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End of presentation
Title: Practical approaches to ORSA
Questions are welcome
Contact details:
Caspar Richter, CEO, Actuary M.Sc.
Caspar.Richter@SolvencyTool.com
+45 6086 3604
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