ORSA for Dummies. Institute of Risk Management Solvency II Group April 17th Peter Taylor

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1 ORSA for Dummies Institute of Risk Management Solvency II Group April 17th 2012 Peter Taylor

2 ORSA for - the Dummies heart of Solvency II Institute of Risk Management Solvency II Group April 17th 2012 Peter Taylor

3 Summary Most of Solvency II (SII) is an obsession with:

4 Summary Most of Solvency II (SII) is an obsession with: little understood risk + organisational hygiene

5 Summary Most of Solvency II (SII) is an obsession with: little understood risk + organisational hygiene But the ORSA is about business - risk appetite not just about risk

6 Summary Most of Solvency II (SII) is an obsession with: little understood risk + organisational hygiene But the ORSA is about business - risk appetite not just about risk The ORSA articulates the business plan, over many years not just one, with the constraint: ORSA 1 yr capital requirement within the SCR

7 Summary Most of Solvency II (SII) is an obsession with: little understood risk + organisational hygiene But the ORSA is about business - risk appetite not just about risk The ORSA articulates the business plan, over many years not just one, with the constraint: ORSA 1 yr capital requirement within the SCR ORSA - the heart of Solvency II

8 Let s get some guidance

9 CEIOPS Level 1 Directive Article As part of its risk-management system every insurance undertaking and reinsurance undertaking shall conduct its own risk and solvency assessment. That assessment shall include at least the following: (a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking; (b) the compliance, on a continuous basis, with the capital requirements, as laid down in Chapter VI, Sections 4 and 5 and with the requirements regarding technical provisions, as laid down in Chapter VI, Section 2; (c) the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement as laid down in Article 101(3), calculated with the standard formula in accordance with Chapter VI, Section 4, Subsection 2 or with its partial or full internal model in accordance with Chapter VI, Section 4, Subsection For the purposes of paragraph 1(a), the undertaking concerned shall have in place processes which are proportionate to the nature, scale and complexity of the risks inherent in its business and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is or could be exposed. The undertaking shall demonstrate the methods used in that assessment. 3. In the case referred to in paragraph 1(c), when an internal model is used, the assessment shall be performed together with the recalibration that transforms the internal risk numbers into the Solvency Capital Requirement risk measure and calibration. 4. The own-risk and solvency assessment shall be an integral part of the business strategy and shall be taken into account on an ongoing basis in the strategic decisions of the undertaking. 5. Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1 regularly and without any delay following any significant change in their risk profile. 6. The insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own-risk and solvency assessment as part of the information reported under Article The own-risk and solvency assessment shall not serve to calculate a capital requirement. The Solvency Capital Requirement shall be adjusted only in accordance with Articles 37, 231 to 233 and 238.

10 CEIOPS Level 1 Directive Article As part of its risk-management system every insurance undertaking and reinsurance undertaking shall conduct its own risk and solvency assessment. That assessment shall include at least the following: (a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking; Own risk and solvency assessment (b) the compliance, on a continuous basis, with the capital requirements, as laid down in Chapter VI, Sections 4 and 5 and with the requirements regarding technical provisions, as laid down in Chapter VI, Section 2; (c) the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement as laid down in Article 101(3), calculated with the standard formula in accordance with Chapter VI, Section 4, Subsection 2 or with its partial or full internal model in accordance with Chapter VI, Section 4, Subsection For the purposes of paragraph 1(a), the undertaking concerned shall have in place processes which are proportionate to the nature, scale and complexity of the risks inherent in its business and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is or could be exposed. The undertaking shall demonstrate the methods used in that assessment. 3. In the case referred to in paragraph 1(c), when an internal model is used, the assessment shall be performed together with the recalibration that transforms the internal risk numbers into the Solvency Capital Requirement risk measure and calibration. 4. The own-risk and solvency assessment shall be an integral part of the business strategy and shall be taken into account on an ongoing basis in the strategic decisions of the undertaking. 5. Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1 regularly and without any delay following any significant change in their risk profile. 6. The insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own-risk and solvency assessment as part of the information reported under Article The own-risk and solvency assessment shall not serve to calculate a capital requirement. The Solvency Capital Requirement shall be adjusted only in accordance with Articles 37, 231 to 233 and 238.

11 CEIOPS Level 1 Directive Article As part of its risk-management system every insurance undertaking and reinsurance undertaking shall conduct its own risk and solvency assessment. That assessment shall include at least the following: (a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking; (b) the compliance, on a continuous basis, with the capital requirements, as laid down in Chapter VI, Sections 4 and 5 and with the requirements regarding technical provisions, as laid down in Chapter VI, Section 2; (c) the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement as laid down in Article 101(3), Solvency calculated linked with the to standard formula in accordance with Chapter VI, Section 4, Subsection 2 or with its partial or full internal model in accordance with Chapter VI, Section 4, Subsection 3. strategy 2. For the purposes of paragraph 1(a), the undertaking concerned shall have in place processes which are proportionate to the nature, scale and complexity of the risks inherent in its business and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is or could be exposed. The undertaking shall demonstrate the methods used in that assessment. 3. In the case referred to in paragraph 1(c), when an internal model is used, the assessment shall be performed together with the recalibration that transforms the internal risk numbers into the Solvency Capital Requirement risk measure and calibration. 4. The own-risk and solvency assessment shall be an integral part of the business strategy and shall be taken into account on an ongoing basis in the strategic decisions of the undertaking. 5. Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1 regularly and without any delay following any significant change in their risk profile. 6. The insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own-risk and solvency assessment as part of the information reported under Article The own-risk and solvency assessment shall not serve to calculate a capital requirement. The Solvency Capital Requirement shall be adjusted only in accordance with Articles 37, 231 to 233 and 238.

12 CEIOPS Level 1 Directive Article As part of its risk-management system every insurance undertaking and reinsurance undertaking shall conduct its own risk and solvency assessment. That assessment shall include at least the following: (a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking; (b) the compliance, on a continuous basis, with the capital requirements, as laid down in Chapter VI, Sections 4 and 5 and with the requirements regarding technical provisions, as laid down in Chapter VI, Section 2; (c) the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement as laid down in Article 101(3), calculated with the standard formula in accordance with Chapter VI, Section 4, Subsection 2 or with its partial or full internal model in accordance with Chapter VI, Section 4, Subsection 3. Consistency of ORSA 2. For the purposes of paragraph 1(a), the undertaking concerned shall have in place processes which are proportionate to the nature, scale and complexity of the risks inherent in its business and which enable it to properly identify and assess the risks it faces in the short and SCR capital and long term and to which it is or could be exposed. The undertaking shall demonstrate the methods used in that assessment. 3. In the case referred to in paragraph 1(c), when an internal model is used, the assessment shall be performed together with the recalibration that transforms the internal risk numbers into the Solvency Capital Requirement risk measure and calibration. 4. The own-risk and solvency assessment shall be an integral part of the business strategy and shall be taken into account on an ongoing basis in the strategic decisions of the undertaking. 5. Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1 regularly and without any delay following any significant change in their risk profile. 6. The insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own-risk and solvency assessment as part of the information reported under Article The own-risk and solvency assessment shall not serve to calculate a capital requirement. The Solvency Capital Requirement shall be adjusted only in accordance with Articles 37, 231 to 233 and 238.

13 CEIOPS Level 1 Directive Article As part of its risk-management system every insurance undertaking and reinsurance undertaking shall conduct its own risk and solvency assessment. That assessment shall include at least the following: (a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking; (b) the compliance, on a continuous basis, with the capital requirements, as laid down in Chapter VI, Sections 4 and 5 and with the requirements regarding technical provisions, as laid down in Chapter VI, Section 2; Hygiene zzzz (c) the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying Hygiene the Solvency Capital Requirement as laid down in Article 101(3), calculated with the standard formula in accordance with Chapter VI, Section 4, Subsection 2 or with its partial or full internal model in accordance with Chapter VI, Section 4, Subsection For the purposes of paragraph 1(a), the undertaking concerned shall have in place processes which are proportionate to the nature, scale and complexity of the risks inherent in its business and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is or could be exposed. The undertaking shall demonstrate the methods used in that assessment. 3. In the case referred to in paragraph 1(c), when an internal model is used, the assessment shall be performed together with the recalibration that transforms the internal risk numbers into the Solvency Capital Requirement risk measure and calibration. 4. The own-risk and solvency assessment shall be an integral part of the business strategy and shall be taken into account on an ongoing basis in the strategic decisions of the undertaking. 5. Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1 regularly and without any delay following any significant change in their risk profile. 6. The insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own-risk and solvency assessment as part of the information reported under Article The own-risk and solvency assessment shall not serve to calculate a capital requirement. The Solvency Capital Requirement shall be adjusted only in accordance with Articles 37, 231 to 233 and 238.

14 CEIOPS Level 1 Directive Article As part of its risk-management system every insurance undertaking and reinsurance undertaking shall conduct its own risk and solvency assessment. That assessment shall include at least the following: (a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking; (b) the compliance, on a continuous basis, with the capital requirements, as laid down in Chapter VI, Sections 4 and 5 and with the requirements regarding technical provisions, as laid down in Chapter VI, Section 2; (c) the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement as laid down in Article 101(3), calculated with the standard formula in accordance with Chapter VI, Section 4, Subsection 2 or with its partial or full internal model in accordance with Chapter VI, Section 4, Subsection For the purposes of paragraph 1(a), the undertaking concerned shall have in place processes which are proportionate to the nature, scale and complexity of the risks inherent in its business and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is or could be exposed. The undertaking shall demonstrate the methods used in that assessment. 3. In the case referred to in paragraph 1(c), when an internal model is used, the assessment shall be performed together with the recalibration that transforms the internal risk numbers into the Solvency Capital Requirement risk measure and calibration. 4. The own-risk and solvency assessment shall be an integral part of the business strategy and shall be taken into account on an ongoing basis in the strategic decisions of the undertaking. 5. Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1 regularly and without any delay following any significant change in their risk profile. 6. The insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own-risk and solvency assessment as part of the information reported under Article 35. ORSA Process 7. The own-risk and solvency assessment shall not serve to calculate a capital requirement. The Solvency Capital Requirement shall be adjusted only in accordance with Articles 37, 231 to 233 and 238.

15 1. As part of its risk-management system every insurance undertaking and reinsurance undertaking shall conduct its own risk and solvency assessment. That assessment shall include at least the following: (a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking; (b) the compliance, on a continuous basis, with the capital requirements, as laid down in Chapter VI, Sections 4 and 5 and with the requirements regarding technical provisions, as laid down in Chapter VI, Section 2; (c) the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement as laid down in Article 101(3), calculated with the standard formula in accordance with Chapter VI, Section 4, Subsection 2 or with its partial or full internal model in accordance with Chapter VI, Section 4, Subsection For the purposes of paragraph 1(a), the undertaking concerned shall have in place processes which are proportionate to the nature, scale and complexity of the risks inherent in its business and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is or could be exposed. The undertaking shall demonstrate the methods used in that assessment. 3. In the case referred to in paragraph 1(c), when an internal model is used, the assessment shall be performed together with the recalibration that transforms the internal risk numbers into the Solvency Capital Requirement risk measure and calibration. 4. The own-risk and solvency assessment shall be an integral part of the business strategy and shall be taken into account on an ongoing basis in the strategic decisions of the undertaking. Reporting zzz CEIOPS Level 1 Directive Article Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1 regularly and without any delay following any significant change in their risk profile. 6. The insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own-risk and solvency assessment as part of the information reported under Article The own-risk and solvency assessment shall not serve to calculate a capital requirement. The Solvency Capital Requirement shall be adjusted only in accordance with Articles 37, 231 to 233 and 238.

16 CEIOPS Level 1 Directive Article As part of its risk-management system every insurance undertaking and reinsurance undertaking shall conduct its own risk and solvency assessment. That assessment shall include at least the following: So (a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking; (b) the compliance, on a continuous basis, with the capital requirements, as laid down in Chapter VI, Sections 4 and 5 and with the requirements regarding technical provisions, as laid down in Chapter VI, Section 2; 1. It s your own solvency and risk assessment (c) the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement as laid down in Article 101(3), calculated with the standard formula in accordance with Chapter VI, Section 4, Subsection 2 or with its partial or full internal model in accordance with Chapter VI, Section 4, Subsection 3. driven from business strategy 2. For the purposes of paragraph 1(a), the undertaking concerned shall have in place processes which are proportionate to the nature, scale and complexity of the risks inherent in its business and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is or could be exposed. The undertaking shall demonstrate the methods used in that assessment. 2. It requires consistency with SCR capital 3. In the case referred to in paragraph 1(c), when an internal model is used, the assessment shall be performed together with the recalibration that transforms the internal risk numbers into the Solvency Capital Requirement risk measure and calibration. 4. The own-risk and solvency assessment shall be an integral part of the business strategy and shall be taken into account on an ongoing basis in the strategic decisions of the undertaking. 3. Changes are driven rom risk profile 5. Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1 regularly and without any delay following any significant change in their risk profile. 6. The insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own-risk and solvency assessment as part of the information reported under Article It involves some hygiene and reporting 7. The own-risk and solvency assessment shall not serve to calculate a capital requirement. The Solvency Capital Requirement shall be adjusted only in accordance with Articles 37, 231 to 233 and 238.

17 CEIOPS ORSA Issue Paper May 2008 the ORSA can be defined as the entirety of the processes and procedures employed to identify, assess, monitor, manage, and report the short and long term risks a (re)insurance 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.

18 CEIOPS ORSA Issue Paper May 2008 the ORSA can be defined Er as the entirety of the processes and procedures employed to identify, assess, monitor, manage, and report the short and long So it s term pretty risks a (re)insurance much risk management, undertaking faces or may face and very to determine helpful, the own funds necessary to ensure that the undertaking s overall thanks a lot, solvency needs are met at all times. I ll call you when I next need guidance

19 BaFin 2007

20 BaFin 2007 One of a zzzzillion ORSA structure slides from regulators and consultants We have a few coming up shortly!

21 Example The Lloyd s-style ORSA Section Summary description Est. pages A. Executive Summary Summary of the ORSA results for discussion 3-5 B. ORSA process Summary of the ORSA process Highlights any key aspects from the most recent results 1-2 C. Strategy and business context Summary of current business strategy and risk appetite Demonstrates link between strategy, risk and capital 1-2 D. Risk exposure Current risk profile against risk appetite Includes market and Corporation risks E. Capital requirement Required capital (regulatory and economic) Analysis of key drivers F. Solvency assessment Available funds to meet capital requirement Analysis of composition G. Forward-looking assessment Expected future risk, capital and solvency profile Capital plan and contingency planning as required 1-2 H. Stress & scenario testing Potential risk, capital and solvency profile under various stressed conditions 1-2 I. Independent Assessment Summary outcome of independent review of ORSA 1 J. Appendices and References Additional information as required, in particular documentation of static elements of the ORSA TBC

22 Example The Lloyd s-style ORSA Section Summary description Est. pages A. Executive Summary Summary of the ORSA results for discussion 3-5 B. ORSA process Summary of the ORSA process Highlights any key aspects from the most recent results 1-2 C. Strategy and business context Summary of current business strategy and risk appetite Demonstrates link between strategy, risk and capital 1-2 D. Risk exposure Current risk profile against risk appetite Includes market and Corporation risks 3-5 E. Capital requirement Required capital (regulatory and economic) 3-5 Analysis of key drivers That s more like it, something useful F. Solvency assessment Available funds to meet capital requirement 1-2 Analysis of composition G. Forward-looking assessment Expected future risk, capital and solvency profile Capital plan and contingency planning as required 1-2 H. Stress & scenario testing Potential risk, capital and solvency profile under various stressed conditions 1-2 I. Independent Assessment Summary outcome of independent review of ORSA 1 J. Appendices and References Additional information as required, in particular documentation of static elements of the ORSA TBC

23 SII Summary Business Plan

24 SII Summary S II Internal Model Hygiene Business Plan

25 SII Summary SII SCR S II Internal Model Hygiene Business Plan

26 SII Summary ORSA SII SCR S II Internal Model Hygiene Business Plan

27 Next Level Business Plan

28 Next Level Objectives Risks Hygiene Business Plan

29 Next Level Risk Appetite S II Internal Model Objectives Risks Hygiene Business Plan

30 Next Level SII SCR Risk Appetite S II Internal Model SII Standard Formula Objectives Risks Hygiene Business Plan

31 Next Level ORSA SII SCR Risk Appetite S II Internal Model SII Standard Formula Objectives Risks Hygiene Business Plan

32 Next Level ORSA SII SCR Risk Appetite S II Internal Model SII Standard Formula Objectives Risks Hygiene Business Plan

33 ORSA Detail ORSA Risk Appetite Objectives Risks

34 ORSA Detail ORSA Risk Appetite Objectives Risks Time

35 ORSA Detail ORSA Risk Appetite Processes & Controls Objectives Risks Time

36 ORSA Detail ORSA Risk Appetite Processes & Controls Objectives Risks Risk Register Time

37 ORSA Detail ORSA Hygiene Risk Appetite Processes & Controls Objectives Risks Risk Register Time

38 ORSA Detail ORSA Hygiene Risk Appetite Risk Tolerance Processes & Controls Objectives Risks Risk Register Time

39 ORSA Detail ORSA Hygiene Risk Appetite Risk Tolerance Processes & Controls Objectives Risks Risk Register Time

40 ORSA Detail ORSA ORSA SCR Check Hygiene Risk Appetite Risk Tolerance Processes & Controls Objectives Risks Risk Register Time

41 ORSA Detail Report & Explain ORSA ORSA SCR Check Hygiene Risk Appetite Risk Tolerance Processes & Controls Objectives Risks Risk Register Time

42 Business Plans Risk Appetite The ORSA Process Report Checks Key Questions Our Agenda

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44 Business Plans Why are you in business? What do you want to achieve? How do you intend to do it? How do you propose to check that you are operating in line with your intentions? How do you keep the Regulators happy? How do you keep investors happy? What s your Strategy? What are your Processes and Controls? How do you Report and Explain?

45 The Wisdom of the Crowds SOURCE: Shaun Wang

46 The ^ Wisdom of the Crowds SOURCE: Shaun Wang

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51 Probability Scale Residual Risk Inherent Risk 4 Underwriting Limits 3 Delegated Authorities 2 Delegated Authorities 1 Underwriting Limits Reserving Catastrophe Loss Reserving Catastrophe Loss 0 0 A 1 B 2 C 3 D 4 Impact Scale

52 Probability Scale Residual Risk Inherent Risk 4 Underwriting Limits 3 Delegated Authorities 2 Delegated Authorities 1 Underwriting Limits Reserving Catastrophe Loss Reserving Catastrophe Loss 0 0 A 1 B 2 C 3 D 4 Impact Scale Capital Utilisation % 110% 102% 96% 52% 71% 63% Class A Class B Combined

53 Probability Scale Residual Risk Inherent Risk 4 Underwriting Limits 3 Delegated Authorities 2 Delegated Authorities 1 Underwriting Limits Reserving Catastrophe Loss Reserving Catastrophe Loss 0 0 A 1 B 2 C 3 D 4 Impact Scale Capital Utilisation % 110% 102% 96% 52% 71% 63% Class A Class B Combined

54 Undiversified EC ClassRisk A Residual 40.0 Inherent Risk Class B Combined 4 Diversified EC Var 200 Capital Underwriting Limits 3 Probability Scale 3 2 Delegated Authorities Delegated Authorities 2 Underwriting Limits Reserving 1 1 Catastrophe Loss Catastrophe Loss Reserving 0 0 A 1 B C 2 3 D 4 Impact Scale Capital Utilisation % 110% 102% 71% 96% 63% 52% Class A Class B Combined

55 Undiversified EC ClassRisk A Residual 40.0 Inherent Risk Class B Combined 4 Diversified EC Var 200 Capital Underwriting Limits 3 Probability Scale 3 2 Delegated Authorities Delegated Authorities 2 Underwriting Limits 1 Reserving Catastrophe Loss Catastrophe Loss 1 JointDistribution pdfreserving Joint Profit/Loss 60% 50% 0 40% 0 A 1 B C 2 3 D 4 Impact Scale 30% 20% 10% Capital Utilisation % 0% % % 102% % 52% Class A Class B Combined 95 96%

56 Risk/Reward (Profit/Loss Distribution) Mean Profit in $m Joint 10 A Diversified EC Var 200 Capital Underwriting Limits Inherent Risk Class B Combined Risk (VaR at 25 years) in $m 3 Delegated Authorities Probability Scale ClassRisk A Residual 6 B Delegated Authorities 2 Underwriting Limits 1 Reserving Catastrophe Loss Catastrophe Loss JointDistribution pdfreserving Joint Profit/Loss 1-60 Undiversified EC 8 60% 50% 0 40% 0 A 1 B C 2 3 D 4 Impact Scale 30% 20% 10% Capital Utilisation % 0% % % 102% % 52% Class A Class B Combined 95 96%

57 Risk/Reward (Profit/Loss Distribution) Mean Profit in $m Joint 10 A Diversified EC Var 200 Capital Underwriting Limits Inherent Risk Class B Combined Risk (VaR at 25 years) in $m 3 Delegated Authorities Probability Scale ClassRisk A Residual 6 B Delegated Authorities 2 Underwriting Limits 1 Reserving Catastrophe Loss Catastrophe Loss JointDistribution pdfreserving Joint Profit/Loss 1-60 Undiversified EC 8 60% 50% 0 40% 0 A 1 B C 2 3 D 4 Impact Scale 30% 20% 10% Capital Utilisation % 0% % % 102% % 52% Class A Class B Combined 95 96%

58 Risk Appetite ISO / Guide 73 Amount and type of risk that an organisation is willing to pursue or retain Definition of Risk Appetite BS31100 Amount and type of risk that an organisation is prepared to seek, accept or tolerate

59 Risk Appetite ISO / Guide 73 Amount and type of risk that an organisation is willing to pursue or retain Definition of Risk Appetite BS31100 Amount and type of risk that an organisation is prepared to seek, accept or tolerate

60 Risk Appetite ISO / Guide 73 Amount and type of risk that an organisation is willing to pursue or retain Definition of Risk Appetite BS31100 Amount and type of risk that an organisation is prepared to seek, accept or tolerate

61 Risk Appetite ISO / Guide 73 Amount and type of risk that an organisation is willing to pursue or retain Definition of Risk Appetite BS31100 Amount and type of risk that an organisation is prepared to seek, accept or tolerate Objectives Risks Time

62 Risk Appetite ISO / Guide 73 Amount and type of risk that an organisation is willing to pursue or retain Definition of Risk Appetite BS31100 Amount and type of risk that an organisation is prepared to seek, accept or tolerate How much risk are we prepared to take to achieve our objectives over what period of time? Objectives Risks Time

63 Objectives and Risks Risk Appetite Objectives Risks

64 Some Objectives Regulation Profitability Stability Liquidity Staff Reputation Solvency Capital Requirement ORSA Return on Capital Combined Ratio Premium Income Maximum bearable losses Worst bearable year Capital provider float Pay policyholders Pay expenses Retain Management Team Develop Talent Low Turnover No adverse publicity Excellent client service Quality firm 1 year 10 years 10 years 10 years Any 2 years Any one event Any one year After 3 years Each day Each month Over 5 years Over 10 years Any 2 years All the time Over 5 years Over 10 years

65 Some Risks Underwriting Capital Catastrophe Reserving Loss of capital provider(s) Reduced capital 1 year 10 years 10 years 10 years Market Loss of value of Investments 1 year Credit Reinsurer credit 1 year Liquidity Lack of cashflow Each day Operational Reputation Loss of key staff Failure of resources Failure of processes Failure of governance Poor publicity Poor client service Excessive remuneration Any 1 quarter At any time At any time At any time All the time Over 5 years In next 2 years

66 Strategies Objectives Risks Strategies Time

67 Strategies Objectives Risks Strategies Time How much risk are we prepared to take to achieve our objectives over what period of time?

68 Risk Appetite in simple terms Greater risk often equates to greater profit High-return deep-pocket underwriting versus Steady marginal underwriting versus Opportunistic cycle-based underwriting often? When not? With upside comes downside, so the balance to risk appetite is Risk Tolerance How much risk can we afford to bear? Typically measured quantitatively

69 Above all test the Risk Appetite How sensitive to assumptions? What s the range of outcomes? Would my appetite be different if I wanted 90% not average confidence? Over what timelines are these ranges valid? Are these ranges in accord with the approach to risk? What happens to our risk appetite if A severe loss is incurred? (by us/by the market?) A bad year is experienced? How forgiving is our capital?

70 Test Strategies Objectives Example Scenarios Risks Strategies Implications (Measures) Time Test Assumptions

71 Challenge Models! What Models are good at False precision Ranges/distributions of loss Burning costs Relative risk within a peril/region Scenarios Rough estimates What they are not good at Accuracy Point estimate Extreme losses Absolute risk The frequency of these scenarios Sensitivity to assumptions and locations

72 Challenge Models! What Models are good at False precision Ranges/distributions of loss Burning costs Relative risk within a peril/region Scenarios Rough estimates What they are not good at Accuracy Point estimate Extreme losses Absolute risk The frequency of these scenarios Sensitivity to assumptions and locations Ask about: Sensitivity to assumptions Other models Other views (e.g. aggregates/pmls, market share)

73 Risk Appetite for Dummies Relate risk to business objective - state how much risk we are prepared to take to achieve our objectives over what period of time Objectives Example Scenarios Risks Strategies Implications (Measures) Time Test Assumptions Give examples, implications, and ask for challenge Explain level of confidence in each scenario (the chance of the scenario happening and our confidence in this estimate)

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75 Objectives What are we trying to achieve? How do we measure it?

76 Objectives What are we trying to achieve? How do we measure it? Risks What are the risks related to these objectives? What mitigations are in place?

77 Objectives What are we trying to achieve? How do we measure it? Risks What are the risks related to these objectives? What mitigations are in place? Risk Appetite Objectives versus Risk over what timescale? Test - Scenarios? Test - How robust?

78 Objectives What are we trying to achieve? How do we measure it? Risks What are the risks related to these objectives? What mitigations are in place? Risk Appetite Objectives versus Risk over what timescale? Test - Scenarios? Test - How robust? High-return deep-pocket underwriting vs Steady marginal underwriting vs Opportunistic cycle-based underwriting

79 Objectives What are we trying to achieve? How do we measure it? Risks What are the risks related to these objectives? What mitigations are in place? Risk Appetite Objectives versus Risk over what timescale? Test - Scenarios? Test - How robust? The ORSA the heart of Solvency II High-return deep-pocket underwriting vs Steady marginal underwriting vs Opportunistic cycle-based underwriting

80 The ORSA Report Section Summary description Est. pages A. Executive Summary Summary of the ORSA results for discussion 3-5 B. ORSA process Summary of the ORSA process Highlights any key aspects from the most recent results 1-2 C. Strategy and business context Summary of current business strategy and risk appetite Demonstrates link between strategy, risk and capital 1-2 D. Risk exposure Current risk profile against risk appetite Includes market and Corporation risks E. Capital requirement Required capital (regulatory and economic) Analysis of key drivers F. Solvency assessment Available funds to meet capital requirement Analysis of composition G. Forward-looking assessment Expected future risk, capital and solvency profile Capital plan and contingency planning as required 1-2 H. Stress & scenario testing Potential risk, capital and solvency profile under various stressed conditions 1-2 I. Independent Assessment Summary outcome of independent review of ORSA 1 J. Appendices and References Additional information as required, in particular documentation of static elements of the ORSA TBC

81 The ORSA Processes Periodic review Business Plans (objectives, risks, time, strategies) Risk Appetites Risk Tolerances Capital and solvency model Reconcile to SCR Test PLUS Dollops of hygiene Change-generated

82 Change-generated ORSA Process

83 The ORSA and SCR Change Portfolio 120m capital SCR 100m capital Portfolio 1 $100m VaR capital Treaty Cat XL 60% Homeowners 40% 99.5% Annual VaR $80m 99.5% Annual VaR $20m

84 The ORSA and SCR Change Portfolio 120m capital SCR 100m capital Portfolio 1 $100m VaR capital Portfolio 2 $83m VaR capital Treaty Cat XL 60% Homeowners 40% Treaty Cat XL 40% Homeowners 60% 99.5% Annual VaR $80m 99.5% Annual VaR $20m 99.5% Annual VaR $53m 99.5% Annual VaR $30m

85 The ORSA and SCR Change Portfolio 120m capital SCR 100m capital Portfolio 1 $100m VaR capital Portfolio 2 $83m VaR capital Treaty Cat XL 60% Homeowners 40% Treaty Cat XL 40% Homeowners 60% 99.5% Annual VaR $80m 99.5% Annual VaR $20m 99.5% Annual VaR $53m 99.5% Annual VaR $30m

86 The ORSA and SCR Change Portfolio 120m capital SCR 100m capital Portfolio 1 $100m VaR capital Treaty Cat XL 60% Homeowners 40% 99.5% Annual VaR $80m 99.5% Annual VaR $20m

87 The ORSA and SCR Change Portfolio 120m capital SCR 100m capital Portfolio 1 $100m VaR capital Portfolio 3 $117m capital Treaty Cat XL 60% Homeowners 40% Treaty Cat XL 80% Homeowners 20% 99.5% Annual VaR $80m 99.5% Annual VaR $20m 99.5% Annual VaR $107m 99.5% Annual VaR $10m

88 The ORSA and SCR Change Portfolio 120m capital SCR 100m capital Portfolio 1 $100m VaR capital Portfolio 3 $117m capital Treaty Cat XL 60% Homeowners 40% Treaty Cat XL 80% Homeowners 20% 99.5% Annual VaR $80m 99.5% Annual VaR $20m 99.5% Annual VaR $107m 99.5% Annual VaR $10m

89 The ORSA and SCR Reassess Cat Risk down 120m capital SCR 100m capital Portfolio 1 $100m capital Treaty Cat XL 60% Homeowners 40% 99.5% Annual VaR $80m 99.5% Annual VaR $20m

90 The ORSA and SCR Reassess Cat Risk down 120m capital SCR 100m capital Portfolio 1 $100m capital Portfolio 1 $80m capital Treaty Cat XL 60% Homeowners 40% Treaty Cat XL 60% Homeowners 40% 99.5% Annual VaR $80m 99.5% Annual VaR $20m 99.5% Annual VaR $60m 99.5% Annual VaR $20m

91 The ORSA and SCR Reassess Cat Risk down 120m capital SCR 100m capital Portfolio 1 $100m capital Portfolio 1 $80m capital Treaty Cat XL 60% Homeowners 40% Treaty Cat XL 60% Homeowners 40% 99.5% Annual VaR $80m 99.5% Annual VaR $20m 99.5% Annual VaR $60m 99.5% Annual VaR $20m

92 The ORSA and SCR Reassess Cat Risk up 120m capital SCR 100m capital Portfolio 1 $100m capital Treaty Cat XL 60% Homeowners 40% 99.5% Annual VaR $80m 99.5% Annual VaR $20m

93 The ORSA and SCR Reassess Cat Risk up 120m capital SCR 100m capital Portfolio 1 $100m capital Portfolio 1 $130m capital Treaty Cat XL 60% Homeowners 40% Treaty Cat XL 60% Homeowners 40% 99.5% Annual VaR $80m 99.5% Annual VaR $20m 99.5% Annual VaR $110m 99.5% Annual VaR $20m

94 The ORSA and SCR Reassess Cat Risk up 120m capital SCR 100m capital Portfolio 1 $100m capital Portfolio 1 $130m capital Treaty Cat XL 60% Homeowners 40% Treaty Cat XL 60% Homeowners 40% 99.5% Annual VaR $80m 99.5% Annual VaR $20m 99.5% Annual VaR $110m 99.5% Annual VaR $20m

95

96 Key Questions for you to ask What s the business plan? What s making us the money and over what period and with what risk? How is the capital allocated between lines? Have you tested your assumptions? Show me our Risk Register? Are we within Tolerances (gross/net)? Take me through some sample scenarios?

97 Questions to let others ask What s our ERM strategy? Explain our Governance? Explain our Policies, Process and Procedures? Evidence the Use Test? Data quality and data directory? How have we reported this to regulators? Show me our Documentation? Zzzzzz.

98 In Conclusion Management and Regulators can get obsessed with the downside for extremities about which we know little whereas Business is about making profit at levels of exposure about which we do know quite a lot

99 In Conclusion Management and Regulators can get obsessed with the downside for extremities about which we know little whereas Business is about making profit at levels of exposure about which we do know quite a lot and we explain this in the ORSA - the heart of Solvency II

100

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