Presentation on theme: "4. Solvency II – Own Risk and Solvency Assessment (ORSA)"— Presentation transcript:
14. Solvency II – Own Risk and Solvency Assessment (ORSA) Insurance and Reinsurance Stakeholder Group meeting12 December 2011
2Solvency II - ORSA Development process of EIOPA guidelines on ORSA General frameworkobjectives and meansdetails on the ORSA requirementsTowards a formal opinion from the Insurance and Reinsurance Stakeholder Group
3Development process of EIOPA guidelines on ORSA 2008:CEIOPS Consultation Paper on ORSAJanuary-March 2011:Pre-consultation on draft guidelinesJune 2011:Pre-consultation stakeholders meetingNovember 2011 –20 January 2012:Public consultationDiscussion with Insurance and Reinsurance Stakeholder GroupIRSG to provide formal opinion by 20 JanuaryEIOPA has received quite positive feedback from the industry and clarified following issues were clarified:What are quantifiable and non-quantifiable risks under the part of the overall solvency needs.What is a significant deviation from the assumptions underlying the SCR: this is only about whether material quantifiable risks are not covered by the SCR and does not take into account the overall situation of the undertaking.Supervisory reporting will be separated from the Regular Supervisory Report to allow immediate reporting following the conclusion of an ORSA.Third-country undertakings are not required to produce a solo ORSA, but this does not preclude them from being captured as part of the group ORSA.Although the consolidation method includes implicitly the impact of diversification benefits, it remains highly valuable, both for undertakings and supervisors, to provide an appropriate explanation of the sources of diversification benefits.
4General framework Solvency II Directive contains high-level principles Recital 36 => important background information on ORSAArt. 36 => ORSA will be reviewed by supervisorArt. 45 => principles for the ORSAArt. 246 => group ORSANo Delegated Act details expectedGuidelines from EIOPA to specify the expectations
5Objectives of ORSA in Solvency II ORSA is a tool to improve the risk management of EU (re)insurers bypromoting a better understanding of the company’s overall solvency needsdisclosing sufficient and clear information on a company’s risk profileenhancing the board responsibility not to take on more risks than the capital base is allowing.
6It all starts from the top … EIOPAIt all starts from the top …It is a core responsibility of the board not to take on more risks than the capital base is allowingShareholderShareholderShareholderOwnersCapital baseSelection of representativesCapital for running the company e.g. mitigating risksElected boardDay-to-day operationOrganisation
7… and forms an integral part of the business strategy … EIOPA… and forms an integral part of the business strategy …Employees need to be “fit” to execute their tasksBy written proceduresImplementationReportingControlAuditCommentaryWhat are the requirements corresponding to the risk appetite of the supervisory body?The requirements reflect how important the individual elements are.Board of directorsStrategyPoliciesExecutive teamDelegationBusiness processesEmployeesDay to day business
8… by asking the right questions…. Identifying risksDecision on capitalSensitivity analysesUndertaking specific stressesExternal stressGoing concernImpact on SCR?Quantification and mgt actionsProcess stepsB: ”What are the risks that this company might face during the strategic planning period (e.g. 3-5 years)?”E: Delivers an overall picture of the risks pronounced in quantitative figures and qualitative termsB: Decision on which risks are mitigated by capital and which are mitigated by management actions only (e.g. reputational risk)E:B: Asks to quantify risks and develop suitable management actions for non-capital covered risksE: Quantifies risk by use of the organisation and develops suitable management actionsB: “How robust is the assessment of risks? What is the quality of key processes involved (e.g. claims handling)?E: Conducts sensitivity analyses and calculates impact on capital needsB: “What are possible future scenarios that we will have to navigate and what is the likely impact?”E: Conducts undertaking specific stress tests and calculates impact on capital needs as well as developing suitable management actionsB: “What external stresses have not been taking into account already?”E: Conducts external stresses, some of which might be contained in the SCR-calculation, and calculates impact on capital needs as well as developing suitable management actionsB: “What are the key assumptions underlying going concern?”E: Identifies key assumptionsB: “Is the resulting understanding of risks and assumptions reflected in the basis (assumptions, structure, model) for the standard SCR-calculation or internal model, respectivelyE: Evaluates impact and modifies SCR-calculation if neededB ꞊ Board of directorsE ꞊ Executive team (by use of the organisation)
9… and finding the right solutions… Risk pictureOverall solvency needsIdentifying risksDecision on capitalSensitivity analysesUndertaking specific stressesExternal stressGoing concernImpact on SCR?Quantification and mgt actionsInsuranceriskCreditMarketLiquidityOperationalRisk aggregationCapital requirementExpressed in quantitative and qualitative termsConnects business planning to overall solvency needsExplicit identification of possible future scenariosManaging external stressAssess quality of processes and inputOthersand with mgt. actions“Proof” of SCR-calculationMeet with capitalReview assumptions for SCR-calculationReview risk picture in SCR-calculationManagement actions for future scenarios:Develop risk awareness and contingency planning on a regular basisImpact on strategyReview assumptions for business modelReview control and governance
10… for “solo” undertakings and groups. Scope of the group ORSA:Includes third country undertakings, regulated non-EEA and non-regulated undertakingsOverall solvency needs of the group:Covers all group-specific risks and interdependencies taking into account the specificities of the groupKey drivers of diversificationGroup ORSA report:Language of the Group RSR, in case of single possibility to rquire translation of solo parts for solo supervisorsFor single ORSA report: explanation on how subsidiaries are covered and board has been involved in group ORSA
11To conclude: ORSA in a nutshell EIOPATo conclude: ORSA in a nutshellORSA is a risk management process owned by the board which changes the viewing angle from bottom-up to top-down and connects business strategy and capital planning.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 planIntroducing ORSA is a demanding task for the boardThere is no fixed recipe for an ORSAORSA is not an internal model, nor a capital add-onORSA is an integral part of the business strategy and needs to be performed at least annually, has to be performed whenever the risk profile changes significantly, has to be documented and has to be reported internally and to the supervisor
12Towards a formal opinion of the IRSG: areas of attention Style Question 1 Are the guidelines and recommendations clear and will they help the undertaking understand what they are expected to achieve under the requirements of the Solvency II Directive? Content Question 2 Are there any other areas in the scope of Articles 45 and 246 of the Directive where guidelines and recommendations would be useful? Question 3 Are there any practical or operational issues with the application process which can be identified by undertakings? If so, how could they be addressed?
13Areas for discussion with the IRSG ImpactQuestion 4 Do you agree with the analysis of the costs and benefits for the implementation of the guidelines and recommendations? Are there other costs and negative impacts EIOPA should consider? What benefits may flow from the proposed guidelines and recommendations?For example, what would be the potential impact of ORSA on the pricing, design and availability of insurance products, the corresponding effects for consumers and the wider social or economic impacts even if indirectly?Other?