ORSA – the Irish
experience
Mike Claffey
Eoin King
Manx Actuarial Society
2 May 2018
2
Agenda
1. Regulatory environment in Ireland
2. ORSA as a European regulatory tool
3. ORSA – what is it?
4. ORSA – actuarial aspects
5. ORSA – how it developed in Ireland
Ireland
Regulatory environment and the
Insurance Industry
Solvency II in Ireland – the regulatory environment
4
HQ in
Ireland
EU
Branch
Non-
Solv II
Life
45 12 1
Non
-Life
91 30 7
Reinsurance
60 3
Total
196 42 11
9 internal models approved in Ireland plus 3 partial internal
models (more in pipeline)
These slides are for general information/educational purposes only. Action should not be taken solely on the basis of the information set out herein without obtaining specific advice from a qualified adviser.
Regulatory Background
Central Bank of Ireland (CBI)
Established in 2010 through Central Bank Reform Act, 2010
Responsible for both central banking and financial regulation
Replaced the previous entities of the Central Bank and the
Financial Services Authority of Ireland and the Financial
Regulator (‘FR’ or ‘IFSRA’)
Insurance Supervision Mission Statement:
“Protecting consumers through effective supervision that
supports the sustainability of the insurance sector”
These slides are for general information/educational purposes only. Action should not be taken solely on the basis of the information set out herein without obtaining specific advice from a qualified adviser.
6
Role of the Regulator – Prudential Supervision
Prudential supervision i.e. promoting a sound financial system
Solvency and safety of financial institutions provides fundamental protection for consumers
Consumer confidence that their deposits and investments are safe and that their claims can be met
In turn, this contributes to a stable financial system and to the reputation and good standing of the Irish
financial sector
Work is focused on:
These slides are for general information/educational purposes only. Action should not be taken solely on the basis of the information set out herein without obtaining specific advice from a qualified adviser.
7
Minimising the risk of
failure by ensuring
compliance with
prudential and other
requirements
Setting an approach to
regulation based on
risk profile and impact
of default
Ensuring risk
assessment,
measurement and
control techniques in
all sectors of the
industry
Data collection
associated with
developing better early
warning indicators of
prudential stress
A programme of on-site
inspections
Open and challenging
dialogue, underpinned
by a credible threat of
enforcement
CBI Approach - PRISM
Probability Risk and Impact SysteM
Risk/impact based approach to supervision
4 impact categories
These slides are for general information/educational purposes only. Action should not be taken solely on the basis of the information set out herein without obtaining specific advice from a qualified adviser.
8
High
(including
Ultra High)
Medium High
Medium Low
Low
Level of Regulatory Interaction
Potential Impact
196 insurance
and reinsurance
companies
Risk categories under PRISM
Probability risk categories have been updated for insurers to largely mirror Solvency II
requirements
Scale for insurance sector risks changed from “Low to High” scale to 1 – 4
(1 = Low to 4 = High)
CBI to consider each risk category separately
These slides are for general information/educational purposes only. Action should not be taken solely on the basis of the information set out herein without obtaining specific advice from a qualified adviser.
9
ORSA
Its development as a regulatory tool
Solvency II - Three Pillar Approach
11
Pillar 1:
Measurement of
Assets, Liabilities
and Capital
– Asset and liability
valuation
– Technical provisions
– Eligible capital
– Capital requirements
Pillar 2:
Supervisory Review
Process
– Governance framework
– Internal control
– Risk management
– ORSA
Pillar 3:
Reporting and
Disclosure
– Public disclosure
– Supervisory reporting
– Qualitative and
quantitative reporting
11
These slides are for general information/educational purposes only. Action should not be taken solely on the basis of the information set out herein without obtaining specific advice from a qualified adviser.
12
ORSA in development …
2011 discussion papers …
ORSA is a tool to improve the risk management of EU (re)insurers
by
• promoting a better understanding of the company’s overall
solvency needs
• disclosing sufficient and clear information on a company’s risk
profile
• enhancing the board responsibility not to take on more risks
than the capital base is allowing.
“The Own risk and solvency assessment (ORSA) is a
powerful risk management tool that sets out the principles of
forward-looking self assessment of risk management
and solvency for insurers.”
Gabriel Bernardino
Enterprise Risk Autumn 2017
ORSA – EIOPA’s vision
Gabriel Bernardino (EIOPA)
“ORSA is a top-down process owned by the board”
“ORSA is connecting business strategy and capital planning”
“It is core board responsibility not to take on more risks than the capital base
is allowing”
“Two main goals: The board should know that the company can ‘afford’ its
strategic plan 3-5 years ahead including bumps on the way and the board
should know how to execute its strategic plan ”
Actuarial & Risk Management Functions (Solvency II)
Head of Actuarial Function role within Solvency II
Irish approach
Calculate Technical Provisions
Certify Technical Provisions (AOTP) to the CBI
Peer Review of AOTPs required periodically
Opinion on underwriting
CBI Guidance
Opinion on reinsurance arrangements
CBI Guidance
Contribute to the Risk Management System
Actuarial Opinion on ORSA
Undertakings need a Reserving Policy (& Committee for non-life)
15
ORSA
What is it?
Business Plan …
ORSA – back to basics
Own Risk Assessment
• Risk Identification
• Risk Assessment
• Risk Culture
• Risk Reporting
Strategy
Risk Appetite
Own Solvency
Assessment
Economic
Capital Model
Capital Projections
Stress and
Scenario Testing
Own Funds
Analysis
ORSA and business planning
Questions the ORSA should help answer
Understanding of risk profile of the company?
Does company have sufficient capital to support business plan?
Will company stay within risk appetite going forward?
What risks are not covered by regulatory capital?
What risks should be monitored more frequently?
What scenarios could cause solvency issues?
What mitigation options are available in these scenarios?
Key sensitivities to capital & profits?
Material changes to risk profile over recent period?
What would cause company to re-run ORSA?
What is Needed?
1. Board involvement
2. Risk Management System
3. Own Solvency Assessment
4. Business Plan
5. Stress and Scenario Testing
6. Documentation
1. Board Involvement
Need to be able to evidence active involvement
Board is responsible for setting capital held by the Company
Can be difficult to achieve in practice
Board Training on ORSA
Needs to approve policy and final reports
Should be involved in scenarios to be explored
Perhaps through risk committee
Needs to challenge the results
Minutes should record this challenge and discussion
Needs to evidence ORSA in strategic decisions(e.g. capital management, setting risk appetite)
Management actions arising from ORSA
2. Risk Management System
Need the Risk Management System to produce “Own Risk Assessment”
Process to identify, measure, respond, monitor and report risks
Risk appetite is a key element of ORSA
Own Solvency Assessment follows from the risks identified and risk appetite
3. Own Solvency Assessment
Need to define capital measure to use
Use Solvency II measure or something else?
Contract boundaries?
Many companies start with current Solvency II calculations for “capital needs”
Need to consider whether there are any other material risks that should be included
Reputational risk
Strategic risk
Sovereign debt
Changes to capital measures (e.g. EIOPA changes to SCR)
Reminder - Solvency II capital - SCR
4. Business Plan
Forward Looking Assessment needs a base projection
Approved by the Board
Typically 3-5 years
Need to reflect
Sales volumes
Product mix
Expense budgets
Dividend and capital policy
Investment policy
5. Stress and Scenario Testing
Need to apply stresses to base projection
Need to decide upon scenarios
Board involvement required
Focus on material risks
Reflect dependencies (e.g. lapses linked to markets)
Reflect mitigating actions
Reverse stress tests also useful
Determine how much stress the Company can withstand and remain solvent
ORSA
Policy
ORSA
Record
Internal
Report
Supervisory
Report
6. Documentation
These slides are for general information/educational purposes only. Action should not be taken solely on the basis of the information set out herein without obtaining specific advice from a qualified adviser.
6. Documentation
An ORSA policy
Description of processes and procedures
Link b/w risk profile, risk limits and solvency needs
Stress and sensitivity tests, data quality, frequency & timing
A record of each ORSA process
Level 3 text confirms this does not require new documentation to be explicitly produced
Sufficient detail to enable knowledgeable third party to understand and replicate ORSA
Record input data, assumptions, output and how this was arrived at.
An internal report on the ORSA
Sets out main outcomes of ORSA process
The ORSA report should be designed to be used by the Board and relevant executive committees as a tool for managing risk and
capital and in strategic decision making
Does not need to contain details of all the process, rather should reference supporting documents
An ORSA supervisory report
Can be the same document as the internal report
CBI in Ireland require a pro-forma submission for smaller companies (PRISM Low and Medium Low)
These slides are for general information/educational purposes only. Action should not be taken solely on the basis of the information set out herein without obtaining specific advice from a qualified adviser.
28
ORSA
Documents
29
ORSA – a suggested structure for the report
ORSA - Sample Reporting Template
1. Executive Summary
2. Context for ORSA process (relatively static)
Strategy and business context
Risk management framework
System of governance
3. Assessment of overall solvency needs
Link with outputs of risk management system
How risks are managed/mitigated
Capital required for those risks
Stress and Scenario Tests
Analysis of Own Funds
ORSA - Sample Reporting Template
4. Projections – forward looking assessment of overall solvency needs
Forward looking perspective - link with strategy
Stress and scenario testing including reverse stresses
5. Assessment of deviation from SCR assumptions
6. Continuous compliance
Regulatory capital requirements
Technical provision requirements
Quality and loss absorbing capacity of own funds
ORSA - Sample Reporting Template
7. Independent Validation
Independent assessment process
Results of independent assessment
8. Outcomes of ORSA
Review strategy
Management actions
Long term capital management
ORSA
Actuarial aspects
Projection methodologies
• Issues to consider:
– IT resources and run times
– Spurious accuracy
• IMPORTANT: Output must be understood and used by the business
Projecting the Balance Sheet
Deterministic approach may be appropriate for many lines of business
Liabilities
Run-off of Existing BEL and Risk Margin in line with best estimate assumptions
Build model points for future new business
Assets – issues to consider
Granular data available on asset holdings?
What is the company’s ALM strategy?
Reinvestment policy for existing assets?
What assets are assumed to back new business?
What is the company’s capital and dividend policy?
Rebalancing of portfolio in particular scenarios?
Calculation Date
Valuation Date
Real World Scenario
Valuation Scenarios
Projection capability for complex liabilities
Nested loop - real world outer and risk neutral inner
Proxy Model Uses
Corporate Planning/Strategy
• Scenario/stress testing over short to medium term
• Capital evolution under alternative sales scenarios
• Strategic evaluation of M&A transactions
• What-if analysis
• Impact of alternative investment and hedge strategies
Daily Solvency Monitoring
• Evaluate risk exposures against tolerances
• Review solvency position in real-time
• Action to re-align risk profile with risk appetite
Calibration Date
Projection Period
Reporting Date
Projecting assets
Assets backing liabilities
– Need to project t
0
assets to t
n
– Investment return in specific scenario
Value assets at t
n
– Risk free curve applying at that point
– Spreads applying at that point
– Project ratings and spreads?
Rebalance at t
n
– Need to specify simplified rules that dictate rebalancing
– Match liability profile by currency/duration
– Management actions in certain scenarios
Shareholder assets
Asset projections – additional considerations
Stress tests
Taxation
Tiering of Own
Funds
Reinvestment
Data sources
Contingent cash flows
Identification
Modelling
Asset groupings
Traded
Non-traded
Tax and Dividends
Determine tax calculation basis
Dividend policy linked to IFRS profits and Solvency position
Change in net equity on Solvency II basis
– Need to convert to IFRS profits
Need to project Deferred Tax Liability
Identify acceptable simplifications
Projecting SCR
Full recalculation for each future year very onerous
Significant number of market consistent valuations to calculate opening SCR
Projecting forward, total number of calculations mounts up very quickly
Key risk drivers, e.g.
Sums at risk for insurance risks
Growth in equity / property / bonds for market risks
Funds under management for future AMCs
Other options available
Trade off between accuracy and practicality
42
Actuarial Standards
AAE ESAP 3 model standard (ORSA)
https://actuary.eu/documents/ESAP3ORSA_Adopted-_2017-08-02-FINAL.pdf
CBI has issued Guidelines on the “Domestic Actuarial Regime”
https://www.centralbank.ie/regulation/industry-market-sectors/insurance-reinsurance/solvency-
ii/requirements-and-guidance
ORSA
Timeline for development in Ireland
44
Timeline on ORSA development in Ireland
Regulatory priority since 2014
Up to 2014 2015 2016 2017 2018
Solvency II
Second
round of
annual
ORSAs
CBI
Feedback on
ORSA’s
submitted
Preparatory
Guidelines
“FLAOR”
Solvency I
Appointed
Actuary
“Financial
Condition
Report”
Solvency II
ORSA
submission
template to
CBI
CBI
Feedback
on
FLAORs
submitted
Solvency II commences
AAE
ESAP3 (ORSA)
model standard
ORSA – lessons from 2014
Quantitative issues
Producing opening balance sheet & SCR is one thing, but …
… projecting future balance sheets, SCRs, Risk Margins is another
Often multiple models with significant manual processes
The need to start early
For effective Board involvement & challenge
Whose “Own” is it anyway ?
Parent / Group view versus local view
Role of the local Board and local Supervisor
CBI’s attitude to ORSA progress – 2014
Key Points
Board ownership – “so-called use test”
Process as important as the document
Address capital needs – Company own view (not just repeat the Standard Formula)
Issues Noted
Ignore risks that are difficult to quantify
Inadequately tailored to local entities
Stress tests too benign
Fundamental assumptions – business plans and time horizon
Deviation from assumptions – not appropriately addressed
Extra risks not covered by Standard Formula
Milliman client survey 2014 – scope of ORSA “other risks”
ORSA - 2015 Improvements
Milliman client survey 2014
FLAOR 2015 – CBI feedback
May 2016
Overall Solvency
Needs
Continuous compliance
(in the future)
Report structure
Time lags
These slides are for general information/educational purposes only. Action should not be taken solely on the basis of the information set out herein without obtaining specific advice from a qualified adviser.
49
Also mentioned:
• Appropriateness of
Standard Formula (also on
2016 agenda for CBI)
• Board involvement
• SCR and Own Funds
projections – are they
reliable?
• Not very stressful stress
tests
ORSA Feedback – Sylvia Cronin, 13 December 2016
These slides are for general information/educational purposes only. Action should not be taken solely on the basis of the information set out herein without obtaining specific advice from a qualified adviser.
Comprehensive suite of relevant and
current stress tests (e.g. Pension,
Brexit)
The level of involvement and
discussion by the Board within the
ORSA process is an area that our
supervision teams will be assessing on a
continuous basis.
Geopolitical risk:
■ Brexit and results of the US
Presidential election
■ Likely have a profound impact
on how we transact business
in Ireland
■ Such environmental factors
need to be considered
Director of Insurance Supervision, CBI
ORSA Board – Key Questions to Ask (1)
These slides are for general information/educational purposes only. Action should not be taken solely on the basis of the information set out herein without obtaining specific advice from a qualified adviser.
51
Can you demonstrate understanding of the ORSA and implications of results?
Did you take an active role in steering and challenging the ORSA?
Long term capital management?
Business Planning?
Product Development and Design?
Did you approve the ORSA policy?
Did you approve the ORSA report and supervisory report?
Have the ORSA results been communicated to all relevant staff?
Are any material risks missing?
Have the ORSA
results/insights gained
taken into account of:
ORSA Board – Key Questions to Ask (2)
These slides are for general information/educational purposes only. Action should not be taken solely on the basis of the information set out herein without obtaining specific advice from a qualified adviser.
52
How robust are the projections?
What approximations/simplifications have been used?
How achievable are the management actions? Are they approved?
How achievable is the business plan?
Is the Standard Formula appropriate?
Have you ensured continuous compliance?
Are the stress scenarios onerous enough?
Does the ORSA meet all of the Level 1, 2 and 3 requirements?
Did you take account of any CBI feedback (either generic or specific)?
“It is evident that more firms are
finding their ORSA process to
be useful, and to be allied to
their long-term business
planning.”
Sylvia Cronin, Director of Insurance Supervision
European Insurance Forum 16 March 2016
53
Reliances and Limitations
These slides are for general information
purposes only. Action should not be taken solely
on the basis of the information set out herein
without taking specific advice.
