4. Solvency II – Own Risk and Solvency Assessment (ORSA) Insurance and Reinsurance Stakeholder Group meeting 12 December 2011

Solvency II - ORSA Development process of EIOPA guidelines on ORSA General framework objectives and means details on the ORSA requirements Towards a formal opinion from the Insurance and Reinsurance Stakeholder Group

Development process of EIOPA guidelines on ORSA 2008: CEIOPS Consultation Paper on ORSA January-March 2011: Pre-consultation on draft guidelines June 2011: Pre-consultation stakeholders meeting November 2011 – 20 January 2012: Public consultation Discussion with Insurance and Reinsurance Stakeholder Group IRSG to provide formal opinion by 20 January EIOPA 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.

General framework Solvency II Directive contains high-level principles Recital 36 => important background information on ORSA Art. 36 => ORSA will be reviewed by supervisor Art. 45 => principles for the ORSA Art. 246 => group ORSA No Delegated Act details expected Guidelines from EIOPA to specify the expectations

Objectives of ORSA in Solvency II 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.

It all starts from the top … EIOPA It all starts from the top … It is a core responsibility of the board not to take on more risks than the capital base is allowing Share holder Share holder Share holder Owners Capital base Selection of representatives Capital for running the company e.g. mitigating risks Elected board Day-to-day operation Organisation

… 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 tasks By written procedures Implementation Reporting Control Audit Commentary What are the requirements corresponding to the risk appetite of the supervisory body? The requirements reflect how important the individual elements are. Board of directors Strategy Policies Executive team Delegation Business processes Employees Day to day business

… by asking the right questions…. Identifying risks Decision on capital Sensitivity analyses Undertaking specific stresses External stress Going concern Impact on SCR? Quantification and mgt actions Process steps B: ”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 terms B: 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 risks E: Quantifies risk by use of the organisation and develops suitable management actions B: “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 needs B: “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 actions B: “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 actions B: “What are the key assumptions underlying going concern?” E: Identifies key assumptions B: “Is the resulting understanding of risks and assumptions reflected in the basis (assumptions, structure, model) for the standard SCR-calculation or internal model, respectively E: Evaluates impact and modifies SCR-calculation if needed B ꞊ Board of directors E ꞊ Executive team (by use of the organisation)

… and finding the right solutions… Risk picture Overall solvency needs Identifying risks Decision on capital Sensitivity analyses Undertaking specific stresses External stress Going concern Impact on SCR? Quantification and mgt actions Insurance risk Credit Market Liquidity Operational Risk aggregation Capital requirement Expressed in quantitative and qualitative terms Connects business planning to overall solvency needs Explicit identification of possible future scenarios Managing external stress Assess quality of processes and input Others and with mgt. actions “Proof” of SCR-calculation Meet with capital Review assumptions for SCR-calculation Review risk picture in SCR-calculation Management actions for future scenarios: Develop risk awareness and contingency planning on a regular basis Impact on strategy Review assumptions for business model Review control and governance

… for “solo” undertakings and groups. Scope of the group ORSA: Includes third country undertakings, regulated non-EEA and non-regulated undertakings Overall solvency needs of the group: Covers all group-specific risks and interdependencies taking into account the specificities of the group Key drivers of diversification Group ORSA report: Language of the Group RSR, in case of single possibility to rquire translation of solo parts for solo supervisors For single ORSA report: explanation on how subsidiaries are covered and board has been involved in group ORSA

To conclude: ORSA in a nutshell EIOPA To conclude: ORSA in a nutshell ORSA 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 plan Introducing ORSA is a demanding task for the board There is no fixed recipe for an ORSA ORSA is not an internal model, nor a capital add-on ORSA 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

Towards 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?

Areas for discussion with the IRSG Impact Question 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?

Thank you!