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

ORSA: the heart of Risk & Capital Management 1.ORSA: Definition & Scope 2.Strategy, Risk Sources & Risk Appetite 3.The ORSA in Practice 4.Deriving the Business Benefits

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

ORSA: the heart of Risk & Capital Management 1.ORSA: Definition & Scope 2.Strategy, Risk Sources & Risk Appetite 3.The ORSA in Practice 4.Deriving the Business Benefits

Capturing the dynamics of the insurance business Economic Environment Inflation indices, Bond yields, Stock indices, Exchange rates Assets Liabilities Free Capital Company Strategies Reinsurance design Risk taking strategy Asset allocation Capital structure Diversification Insurance Risk Attritional loss Large individual loss Catastrophic event loss Loss reserve variability Pricing cycle Investment Risk Treasury / Municipal bonds Corporate bonds Equities Real Estate Cash Credit Risk Bond defaults Reinsurance receivables Agency balances Operational Risk Outsourcing IT failure Fraud Strategic Risk Group Risk Liquidity Risk Asset-Liability mismatch

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

Linking Strategy and Risk Appetite 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. Capital Management Risk Appetite Strategy Performance Management 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.

ORSA: the heart of Risk & Capital Management 1.ORSA: Definition & Scope 2.Strategy, Risk Sources & Risk Appetite 3.The ORSA in Practice 4.Deriving the Business Benefits

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

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

The Solvency Risk Dashboard (extract)

ORSA: the heart of Risk & Capital Management 1.ORSA: Definition & Scope 2.Strategy, Risk Sources & Risk Appetite 3.The ORSA in Practice 4.Deriving the Business Benefits

Capital Modeling: Helping to build competitive advantage Reinsurance purchasing Product design and pricing Investment strategyReserving approach Portfolio optimisation M&A Continuous improvement Continuous improvement Optimisation

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

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