Own Risk & Solvency Assessment (ORSA): The heart of Risk & Capital Management

Own Risk & Solvency Assessment (ORSA): The heart of Risk & Capital Management John Spencer Director, Ultimate Risk Solutions

ORSA: the heart of Risk & Capital Management • ORSA: Definition & Scope • Strategy, Risk Sources & Risk Appetite • The ORSA in Practice • 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 • Focus is on the process, not the outcome. How does it work? Who owns it and ensures continuous compliance? Multi-disciplinary approach • Bringing the required expertise together in one coherent process. Identification of interdependencies is key. The Past • A review of the firm’s compliance with the technical provisions and the regulatory capital requirements. The Future • Projections of the balance sheet, capital requirements and own funds over the business planning horizon. Documentation • Appropriate evidence for both internal and external stakeholders supervisors that the process is robust. Proportionality • Tailored to the risk profile of the business in showing interrelationship between risks and solvency and establishing Solvency Capital Requirement (SCR)

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 • Liquidity Risk • Asset-Liability mismatch Assets Free Capital • Operational Risk • Outsourcing • IT failure • Fraud Liabilities • Credit Risk • Bond defaults • Reinsurance receivables • Agency balances • Insurance Risk • Attritional loss • Large individual loss • Catastrophic event loss • Loss reserve variability • Pricing cycle • Company Strategies • Reinsurance design • Risk taking strategy • Asset allocation • Capital structure • Diversification

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: Quantitative and qualitative metrics which can be used to articulate the statement. 1. Statements: Translate the corporate strategy into explicit statements of risk RISK APPETITE FRAMEWORK Measures Statements Reporting and decision making 4. Governance: States the roles and responsibilities of individuals charged with delivering risk appetite 3. Limit Framework: Determines the limits or thresholds against the measures Limit Framework Governance

Linking Strategy and Risk Appetite • Setting risk appetite • Benchmarking against peers • Assessing against rating agency models • Formulating risk appetite criteria, such as capital at risk. • Setting strategic direction • Business strategy: • Positioning relative to competitors • Product development • Geographic diversification. • Growth targets • Capital management: • Return on capital targets. • Allocation of capital between risk types • Fungibility of capital. RiskAppetite Strategy Capital Management • 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. Performance Management

Managing the ORSA components 1st Line Business Processes Forward looking assessment Business processes Risk identification Stress and scenario testing Own view of capital Risk monitoring Technical provisions Feedback loop Strategic planning Risk assessment Standard formula SCR Business planning Risk control Internal model SCR Risk reporting Solvency monitoring Strategy Business environment Identify areas of weaknesses in business processes supporting risk and capital assessment Determine internal view of capital requirements now and the future Internal reporting and governance Independent review Supervisory reporting and interaction

New Management Information requirements ORSA will require firms to assess their overall solvency taking into account: • Business strategy • Riskprofile and approved risktolerance limits • Capital needs As well as future changes in the risk profile and capital needs considering extreme scenarios Business Strategy • and link these into one report Firms will need to understand and report on: Be ForwardLooking including stresses Risk profileand tolerance limits Capitalneeds A new MI challenge for many firms

The Solvency Risk Dashboard (extract)

Capital Modeling: Helping to build competitive advantage Optimisation Continuous improvement

ORSA: Deriving the business benefits Increased consideration of Strategic Risk and Operational Risk A consistent basis for comparing projects/strategies with different risk likelihood/impacts Better alignment of remuneration with risk-based performance Improved MI to facilitate better business decision-making Improve capital allocation and maximize risk adjusted returns Optimize effectiveness and lower cost of risk transfer Improved product design & pricing Enhanced transparency and appreciation of risk sources at Board level More streamlined and higher quality reporting through improved data integration Giving all levels of management a deeper understanding of risks/opportunities

Own Risk & Solvency Assessment (ORSA): The heart of Risk & Capital Management John Spencer Director, Ultimate Risk Solutions

Own Risk & Solvency Assessment (ORSA): The heart of Risk & Capital Management