Role of actuarial function supporting the FLAOR leading to the ORSA

1. Role of actuarial function supporting the FLAOR leading to the ORSA Ian Morris June 2014

2. Contents • ORSA requirements • Insurance Rule 31 • The Forward Looking Assessment of Own Risks

3. Introduction to BWCI • Established in 1979 • Independent Partnership • 100 staff (in Guernsey and Jersey) • 15 qualified actuaries • Specialist insurance team • Clients in a range of jurisdictions • Guernsey, Jersey, Malta, Gibraltar, UK, Mauritius etc

4. Own Risk and Solvency Assessment • Article 45 of Solvency II directive • Part of risk management system • Not a capital requirement

5. Key Aims • Assess overall solvency needs • Specific risk profile • Approved risk tolerance limits • Business strategy • Continuous compliance with solvency requirements • How different from standard risk profile?

6. Solvency Assessment • Processes in place proportional to nature, scale and complexity of entity • Properly identify and assess short and long term risks • Demonstrate methods used

7. ORSA • Integral part of business strategy • Used for strategic decisions • Updated regularly and for significant change in risk profile • Results reported to regulator

8. Role of Actuarial Function in ORSA • Contribute to effectiveness of risk modelling • Work highly dependent on nature and scale of entity • …but this is just the minimum requirement

9. How can risk modelling be effective? • Integrate all aspects of risk assessment • Understand how the business sets risk appetite • Model should reflect approach to business • Not just doing projections

10. ORSA for large entity • Likely to be based on detailed model • Possibly an internal model • Would require extensive work and documentation

11. Actuarial challenges • Technical challenge to model a large (and potentially complex business) • Not easy to ensure model is robust • How to communicate results to Board in a way that ORSA is integral to business strategy? • Need to convince a regulator that model is appropriate

12. ORSA for a small entity • How much work is needed? • Will resources be available? • What level of proportionality is appropriate?

13. Actuarial challenges • Undertake enough work to be satisfied that the risk modelling is valid • Simplifications likely to be needed but whose judgement? • How will regulators judge proportionality?

14. Insurance Rule 31 • Implementation of latest EIOPA Guidelines in Malta • Governance • FLAOR • Submission of Information • Pre-application of Internal Models • Effective 1 January 2014

15. Coverage • EIOPA requires entities covering 80% of market share to be included • In practice most entities likely to need to comply

16. Forward Looking Assessment of Own Risks • Proportional • Own risk management • Nature, scale and complexity • Role of Board • Should steer process • Challenge results

17. Process • Documentation needed includes • Policy for assessment • Record of each assessment • Internal report • Supervisory report

18. Policy • Description of processes and procedures • Consideration of risk profile, risk tolerance limits and solvency needs • Information on • How and how often stress tests, sensitivity etc • Data quality • Frequency (with rationale) • Timing (and circumstances that would change this)

19. Reporting • Appropriate evidence and documentation • Internal report (to all relevant staff) • Supervisory report to include • Qualitative and quantitative results • Methods and assumptions • Comparison of solvency needs, regulatory capital and own funds

20. Specific guidance • Use standard basis or justify alternatives • Express quantitatively and qualitatively • Adequate range of stress and sensitivity tests • Forward looking (medium or long term) • Regulatory capital • Comply on continuous basis • Potential changes in risk • Impact of asset changes

21. Technical Provisions • Seek advice from actuarial function • Continuous compliance with requirements on calculation of technical provisions • Identify risks from uncertainties relating to this calculation • Assess whether risk profile deviates from standard model

22. Strategy • Take into account results and insights • Capital management • Business planning • Product development and design

23. Role of actuarial function • If limited to minimum level in the guidance will this be enough to prepare for ORSA? • What will regulators expect?

24. Wider view needed (in my opinion) • Look at elements required • Consider actuarial aspects • Direct issues impacting on technical provisions • Other issues which have potential impact for risk modelling

25. Actuary should consider • Approach to risk management • Understood • Reasonable • Proportional • Nature • Scale • Complexity

26. Documentation • Is this adequate? • Would actuarial view help? • What reports should actuarial function produce (or comment on)?

27. Policy • Should be able to add value in many areas • Risk profile • Risk tolerance • Stress tests • Sensitivity • Data

28. Reporting • Actuarial function should be able to bring rigor and technical expertise to reports • Value to board • Value to regulator

29. Benefits of wider view • Actuarial function should have deeper understanding of risk and modelling • Sounder basis for advice • More comfort to regulator

30. Problems with wider view approach • Will adequate resources be available to allow actuarial function this depth of involvement? • Do we have all the skills needed? • Communication challenge to • Establish resources • Provide response that shows value from involvement

31. ?Questions?