Tag Archives: ORSA

Recent developments in conduct risk management

For a number of years now, legislators from around the globe have poured huge energy and resources into assisting with the development, and in some cases complete reworking, of their prudential regulatory regimes. Local regulatory authorities have been similarly active in the implementation of these changes. Finally, the dust is starting to settle on this latest wave of change, with the likes of Solvency II for insurers now in place in Europe, and the Own Risk and Solvency Assessment (ORSA), in its various guises, firmly recognised globally as a key cornerstone of best practice when it comes to sound solvency management.

Now attention is slowly but surely starting to turn to conduct, the second key function of regulatory authorities, and legislators have become active again. Recent years have seen conduct risk push its way ever higher up the agenda. What do we mean by conduct risk though? The International Association of Insurance Supervisors (IAIS) has succinctly described it as ‘the risk to customers, insurers, the insurance sector or the insurance market that arises from insurers and/or intermediaries conducting their business in a way that does not ensure fair treatment of customers.’ The chair of the Financial Stability Board (FSB) has stated that ‘the scale of misconduct in some financial institutions has risen to a level that has the potential to create systemic risks.’ Such observations have served to further place conduct risk management in the spotlight, not just in the insurance industry but across the whole spectrum of financial services firms.

So what has been happening in this space? At a global level, the IAIS and the FSB have both been active. The IAIS has, through its Insurance Core Principles (ICPs), set out a number of key conduct requirements, namely suitability of persons (ICP5), corporate governance (ICP7), risk management and internal controls (ICP8) and conduct of business (ICP19). The FSB, charged with developing and promulgating global financial policies designed to minimise the likelihood of another financial crisis, has published a number of reports on measures to tackle misconduct in financial services. In May last year, it published a report setting out the next steps in its work to consider the role that governance frameworks have to play in reducing misconduct. It listed the following five themes as key elements of conduct risk management:

1. Clearly defined corporate strategy and risk appetite with relevant controls.
2. Appropriate expertise, stature, responsibility, independence, prudence, transparency and oversight on the part of board members and control functions.
3. Corporate culture.
4. Effective control environment.
5. Appropriate people management and incentives.

Continue reading

Recovery plans: A natural extension of the ORSA

Recovery and resolution1 plans (RRPs) are becoming increasingly important for insurance and reinsurance companies. A requirement to develop RRPs already applies to global systemically important insurers (G-SIIs) and in some territories we are also seeing requirements coming into force which apply to smaller insurers that have not been classified as G-SIIs. In Europe, for example, the European Insurance and Occupational Pensions Authority (EIOPA) is looking at the area of recovery and resolution planning, with Gabriel Bernardino stating that ‘One of the lessons learned from the recent financial crisis is the need to have in place adequate recovery and resolution tools which will enable national authorities to intervene in failing institutions and resolve failures when these materialise in an effective and orderly manner.’2 This speech was followed by the release of an EIOPA discussion paper on the potential harmonisation of recovery and resolution frameworks for insurers.

This blog post offers a look at the link between RRPs and the Solvency II Own Risk and Solvency Assessment (ORSA).

ORSA requirements
One of the key aims of the ORSA is for insurers to identify and measure the risks that they face, with a view to either holding capital against these risks, or taking steps to manage or mitigate them. This process is called the insurer’s assessment of its overall solvency needs.

Guideline 7 of the Solvency II Level 3 Guidelines on the ORSA covers this assessment. It says that, “The undertaking should provide a quantification of the capital needs and a description of other means needed to address all material risks ….”

The explanatory text of this guideline expands on the factors to be considered by companies in deciding whether to cover risk with capital or to use risk mitigation techniques. These considerations include the following:

• If the risks are managed with risk mitigation or recovery techniques, the (re)insurer should explain the techniques used to manage each risk.
• The assessment needs to cover whether the company currently has sufficient financial resources and realistic plans for how to raise additional capital if and when required.
• The assessment of the overall solvency needs is expected to at least reflect the (re)insurer’s management practices, systems and controls, including the use of risk mitigation techniques.
• When assessing the overall solvency needs, the company should also take into account management actions that may be adopted in adverse circumstances. When relying on such actions, companies should assess the implications of taking these actions, including their financial effect, and take into consideration any preconditions that might affect the efficacy of the management actions as risk mitigators. The assessment also needs to address how any management actions would be enacted in times of financial stress.

Based on some of the ORSA reports that I have seen, companies are generally good at identifying possible risks and projecting their solvency positions allowing for the impact of these risks. Companies are also quite good at using the results of such analyses in determining capital buffers as part of the assessment of their overall solvency needs. Furthermore, as required by Solvency II, companies tend to have capital management plans in place, identifying possible shortfalls in own funds and how they might be addressed. However, some of these plans are often quite vague in terms of companies’ prospects of raising capital in the event of financial distress. In such cases, parents might not be willing or able to provide capital and the investment markets might also prove difficult to access.

Continue reading

Issues in brief spring 2016: UK life insurance

The Spring 2016 edition of Milliman’s Issues in Brief features articles about the dynamic reporting of management information (MI), valuing lifetime mortgages, the Own Risk and Solvency Assessment (ORSA) process, and embedded value reporting.

Milliman Risk Talks: ERM implications; third NAIC ORSA pilot

In this episode of Milliman Risk Talks, Mark Stephens and Vikas Shah highlight new insights from the third Own Risk and Solvency Assessment (ORSA) feedback pilot project conducted by the National Association of Insurance Commissioners (NAIC). They also draw on their experiences to show how these observations apply outside of the insurance industry.

To watch our Milliman Risk Talks series, click here.

To learn more about the Milliman Risk Institute, click here.

Stepping stones to ORSA: Looking beyond the preparatory phase of Solvency II

The Solvency II preparatory guidelines require undertakings to prepare a Forward Looking Assessment of Own Risk (FLAOR), which is based on the Own Risk and Solvency Assessment (ORSA) principles. While the FLAOR can be prepared on a “best efforts” basis, it is undoubtedly a useful first step toward full implementation of the ORSA. In this research report, Milliman’s Eamonn Phelan and Sinead Clarke explore the progress that undertakings have made toward meeting the preparatory guidelines in a number of different European countries. They also outline the feedback provided by various European supervisory authorities and discuss the steps that can be taken to build upon what has been achieved during the preparatory phase in order to meet the full requirements of the ORSA from 2016 onward.

Assessing the appropriateness of the Standard Formula

Under the Central Bank of Ireland’s Guidelines on Preparing for Solvency II, all insurance and reinsurance undertakings are required to prepare a Forward-Looking Assessment of Own Risks (FLAOR) in 2014 and 2015. Those companies rated as high or medium-high impact under the Central Bank’s Probability Risk and and Impact SysteM (PRISM) rating system, which are not in either the preapplication or application process for an internal model, are required from 2015 onward to perform an assessment of whether their risk profiles significantly deviate from the assumptions underlying the standard formula Solvency Capital Requirement (SCR). This requirement will apply to all companies from 2016 onward.

Milliman’s Andrew Kay and I conducted a survey analysis of 27 companies in Ireland to gain perspective on the appropriateness of the standard formula for the risk profile of these companies in their 2015 FLAORs. To read the entire analysis, click here.