Tag Archives: ORSA

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.

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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.

Establishing ORSA processes with Solvency II on the horizon

Insurers are finalizing Own Risk and Solvency Assessment (ORSA) trials as they prepare for Solvency II to take effect in January 2016. Assessing and documenting the uncertainties that affect business goals can help firms maintain risk profiles that align with their risk appetites. Milliman consultant Neil Cantle’s article entitled “The final countdown” provides insurers perspective on what they need to consider when running an ORSA exercise.

Here is an excerpt:

The focus on risks that produce financial uncertainty, and specifically those which might be absorbed with capital, has arguably led to a rather indirect way of thinking about risk in insurance. Most firms equate ‘risk’ with the capital needed to absorb it and often avoid the issue of understanding the actual risk itself, which can have consequences beyond immediate financial losses. This has led to wide-spread use of statistical approaches based on loss data and expert estimates which, by design, do not provide any rigorous linkage to other (non-capital) outcomes or directly back to risk management efforts. Scenario-based approaches are slightly more helpful but arguably leave firms open to the criticism that they have missed important scenarios, so the process for choosing them needs to be pretty robust. Developments in causal modelling have enabled firms to tackle this problem and show how the underlying dynamics of risks can simultaneously lead to a range of outcomes.

The regulator has expressed some concern that the types of scenarios and stresses being considered are too focused on regulatory capital (rather than the amount of capital you think you need), concentrated too much on the risks covered by the SCR, and have been rather too simple. Scenario and stress testing methodologies have advanced considerably over the past few years, and a key theme is the need to consider multivariate conditions (as real life tends to combine events).

In most cases, the shortcoming in the methodology is in developing the scenarios in the first place – the models are quite capable of producing the results once you know what the scenario is. The draft guidance is clear that the assessment of risk includes deciding the extent to which non-capital mitigation techniques are used and consideration of the effectiveness of the system of governance in different circumstances. While it is useful to have capital model outputs help you decide whether a scenario is extreme or not, take care not to create a circular argument centered on the model – it is better to decide the right scenarios and then explore their dynamics including, but not limited to, capital consequences.

Top 10 worldwide Milliman publications of 2014

In 2014, Milliman published a range of articles and videos, covering issues including retirement ideas for Millennials, the pros and cons of catastrophe models, the value of enterprise risk management (ERM) programs, and the impact of the Patient Protection and Affordable Care Act (ACA) on financial statements. We also published on challenges related to healthcare costs and insurance and risk management issues—and about real insurance for fantasy football and insurance for ride sharing. To view this year’s 10 most viewed articles and reports, click here.