IAIS Insurance Core Principle 16

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1 Chicago Actuarial Association ORSA Readiness June 19, 2014 IAIS Insurance Core Principle 16 The supervisory regime establishes enterprise risk management requirements for solvency purposes that require insurers to address all relevant and material risks. ICP 16 on ERM The solvency regime requires the insurer regularly to perform its own risk and solvency assessment (ORSA) to assess the adequacy of its risk management and current, and likely future, solvency position. Standard on ORSA 2 1

establishes enterprise risk management requirements for solvency purposes that require insurers to address all relevant and

2 Section 1 Developments in Other Countries 3 Regulatory expectations - EU Solvency needs The overall solvency needs of the business taking into account the risk profile, risk tolerance limits and business strategy this internal measure of solvency may differ from the Directive s requirements Capital compliance The compliance on a continuous basis with the Directive s capital requirements and rules in respect of the establishment of technical provisions Comparison to SCR The extent to which the insurer s risk profile deviates from the assumptions underlying the calculation of its Solvency Capital Requirement (SCR) Internal model use The ORSA will be a key component in demonstrating use of the internal model Solvency II will require insurers to develop and demonstrate an adequate system of governance, including appropriate internal organisation and key functions, an effective risk management system, and prospective risk identification through the own risk and solvency assessment (ORSA). 4 2

3 Regulatory expectations - Japan Risk Management Systems The J-FSA holds ERM interviews with insurance companies to encourage integrated risk management practices. Insurance Groups Confirm the effectiveness of holding companies governance and group-wide integrated risk management systems Underwriting Confirm status and effectiveness of insurer s ability to identify, measure, mitigate risks and enhance financial strength Liabilities Validating sales practices and strategy is reflective of the overall risks and characteristics of its products and supporting distribution channels Fund Management Confirm whether insurers develop and implement fund management policies based on market trends Solvency Assessment Considering introduction of market consistent based regimes Japan continues to consider implementation of ORSA for its insurers. However, it does currently have ORSA Equivalent ERM expectations via one of three key areas to be emphasized in supervision. 5 Regulatory expectations - Bermuda The CISSA and GSSA will provide us with the insurer s or group s perspective on the capital resources necessary to achieve its business strategies and remain solvent given its risk profile and will also gain insights on to the risk management, governance procedures and documentation surrounding this process. Bermuda s Insurance Solvency Framework May 2012 Bermuda s ORSA Developed with guidance from the IAIS and with Solvency II equivalence in mind. Governance Insurers should be able to demonstrate strong links between risk assessments, governance structures and internal capital Economic Balance Sheet assets and liabilities valued on a consistent basis, providing greater transparency of the true economic position (anticipated convergence with IASB/FASB with a phased approach) Forward Looking to deal with the impact of future external changes in an insurer s risk and solvency position Supervisory Tools CISSA and GSSA are expected to be critical tools within the supervisory review process 6 3

identify, measure, mitigate risks and enhance financial strength Liabilities Validating sales practices and strategy is reflective of the overall risks and characteristics of its products and

4 Regulatory expectations - Canada The ORSA should serve as a tool to enhance an insurer s understanding of the interrelationships between its risk profile and capital needs. The ORSA should consider all reasonably foreseeable and relevant material risks, be forward looking and be congruent with an insurer s business and strategic planning. OFSI Guideline paper on ORSA January 2014 Comprehensive identification of Risks under both normal and stressed conditions; insurer s risks are expected to evolve Relate Risk to Capital insurers are expected to set internal targets without undue reliance on regulatory capital measures Board Oversight and Management Responsibility the Board should understand decisions, plans and policies being undertaken by Senior Management with respect to ORSA Monitoring and Reporting the ORSA should contain sufficient information and enable the Board to assess the appropriateness of ORSA Internal Controls and Objective Review calls for a review for integrity and accuracy; including an independent review 7 Section Activities in the US 8 4

OFSI Guideline paper on ORSA January 2014 Comprehensive identification of Risks under both normal and stressed conditions; insurer s risks are expected to evolve Relate Risk to Capital insurers are

5 Regulatory expectations - US The ORSA Summary Report may help determine the scope, depth and minimum timing of risk-focused analysis and examination procedures Insurers with ERM frameworks deemed to be robust for their relative risk may not require the same scope or depth of review, or minimum timing for a risk-focused surveillance as those with less robust ERM functions. NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual Risk management The ORSA will be a tool to help supervisors understand the risks insurers are exposed to, and how adept insurers are at managing those risks. Regulators plan to assess ERM capability, and to use it to guide their supervisory strategy Group capital assessment Examiners and NAIC analysts will use the ORSA March 12, to 2014 assess groups own assessment and management of their capital at group level. While the ORSA will not set a group capital requirement, it will provide information to regulators that will help guide supervisory action Encouraging ERM The NAIC expects the ORSA to help foster effective ERM practices at all insurers, including development of quantitative measures to the enhance ERM practices 9 Progress in the industry US Most have developed a clear understanding of the ORSA requirements of the report that needs to be produced: - Guidance manual - Pilot exercise participation - Group capital metrics Many have focused developments around formalizing risk management processes: - Governance - Appetite & limits - Capital metrics 35% of companies indicated they do not have a risk appetite with tolerances linked to business strategy. 38% of company boards are reported to either not be engaged or only passively engaged in risk management. And, yet, 82% of respondents believe existing ERM processes are largely or already adequate for the RMORSA. 10 5

NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual Risk management The ORSA will be a tool to help supervisors understand the risks insurers are exposed to, and how adept insurers are at

6 Insurance Modernization Companies will be challenged to meet new requirements Insurance companies will need to: Integrate and standardize data sources Develop single source of the truth Set consistent assumptions across GAAP, PBR and Risk Shelve legacy systems and implement modern calculations engines Enhance enterprise architecture around data, systems and tools Rework processes and controls across reporting Reassess TOM, organizational design, competencies and talent Revisit governance, roles and responsibilities Revamp KPI s and management information Retrain stakeholders (Board, Shareholders, Analysts, Management, Employees, etc.) 11 Thank you... Dana Hunt Director Life Insurance Risk & Capital dana.n.hunt@us.pwc.com This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity. 6

controls across reporting Reassess TOM, organizational design, competencies and talent Revisit governance, roles and responsibilities Revamp KPI s and management information Retrain stakeholders

2012 US Insurance ERM & ORSA Survey Key results and findings

www.pwc.com 2012 US Insurance ERM & ORSA Survey Key results and findings June 2013 Henry Jupe Director, Insurance Risk and Capital Practice henry.m.x.jupe@us.pwc.com Antitrust notice The Casualty Actuarial