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

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

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

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?

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

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

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

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

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

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

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

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?

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

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

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

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

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)

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

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

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

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

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

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

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

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

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

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

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

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

?Questions?