Insurance - An Industry in Evolution Supervisor Review Lets talk about... ORSA (Own Risk & Solvency Assessment) December 2 nd 2011 Claus Brinkmann Let's talk about all the good things. And the bad things that may be. Let s talk about ORSA Content Preliminary Remarks What is ORSA? Implementing ORSA Vision Methodology Process Documentation & Report Design ORSA and Use Test Summary Appendix: ORSA across Europe - A Deloitte survey 2 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 1
Preliminary Remarks 3 MIMA Conference, December 2 nd 2011 Insurance An Industry in Evolution Volume vs Value & Risk based Economic value added Premium Losses Expenses CoC t = 0 t = 1 t = 2 t = 3 Measure of sucess Main advantage Main disadvantage Economic Value Added Fully captures the economics of the business Complexity Premium Losses Technical Expenses result - - > 0 Measure of sucess Technical result Main advantage Simple metric while taking the quality of the business into account Main disadvantage Does not capture the true economics the business And this is by the way the SII/EIOPA approach! Premium Volume growth Bigger Is Better! Measure of sucess Main advantage Main disadvantage Volume growth Simplicity Does not consider quality of the business Source: J. Schneider 4 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 2
Insurance An Industry in Evolution Anthony Hilton (Evening Standard 17 September 2010): "The real point is that effective regulation should be a topdown process, not bottom up. What insurance needs,, is for seriously experienced business people to look at the firm's business plan and challenge whether it has the competence to execute it well and the risk controls to alert it in time if something goes wrong. That has to be done at board level. If the regulators are satisfied, there is no problem. If they are unconvinced, they demand more capital or a change in the plan. What we are getting instead is micro-management of the worst sort..., through its (Solvency II) models, trying to tell the industry how to manage itself. Is ORSA the right solution to bring together the nitty-gritty details of the Pillars? 5 MIMA Conference, December 2 nd 2011 Insurance An Industry in Evolution ORSA is a Board Topic ORSA is a communication exercise (internal & external) ORSA pulls together all the existing ERM components ORSA aligns risk appetite and business strategy ORSA is forward looking risk management ORSA is focusing management attention on sensitive risks ORSA might uncover natural hedges ORSA is focused on regular, current and relevant information ORSA brings better risk awareness and foresight ORSA enables more insightful decision making ORSA improves capital efficiency ORSA reduces cost of capital through better management of volatility ORSA gives a chance for internal models, without the formal approval process! Yes ORSA is the approach to force insurers to pull together all the bits & pieces they have worked on so far it facilitates an integration of the Solvency II Pillars and links solvency capital and risk management! 6 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 3
ORSA not limited to European Solvency Discussions On the Top of the Insurance Agenda worldwide! 7 MIMA Conference, December 2 nd 2011 ORSA: Current Status getting to the finish line Level 3 ORSA: & Recommendations Separate ORSA level 3 paper Preconsultation winter 2010/2011 Consultation 09/2011 01/2012 Remarks for standalone and group ORSA As from April 2012: review of comments Source: State of discussion about ORSA, Sibylle Schulz; BaFin, Bonn 13.10.2011 8 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 4
What is ORSA? 9 MIMA Conference, December 2 nd 2011 ORSA is NOT. ORSA is NOT a mechanic calculation ORSA is NOT all about capital (need for non Pillar 1 risks) ORSA is NOT the basis for regulatory capital requirements (SCR) ORSA is NEITHER an internal model NOR creates it a requirement for an internal model via the back door ORSA is NOT complied with by just producing a report or by filling templates ORSA is NOT written down in detailed guidelines ORSA is NOT a one-off exercise 10 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 5
ORSA is an essential part of the Risk Management System Pillar 1 SCR / MCR Standard Formula SCR Partial / Full Internal Model Internal Model Tests & Standards Internal Model Governance Own Risk Solvency Assessment (ORSA) Use Test of an internal model Pillar 2 Pillar 3 Risk Governance (art. 41-49) Disclosures Regulatory Reporting System of Governance of an internal model Solvency II is not just about risk measurement and quantification, rather it is about effective governance and risk management CEIOPS, Lessons learned from the crisis (Solvency II and beyond) 11 MIMA Conference, December 2 nd 2011 The processes companies shall have in place as part of the ORSA are at least as important for the undertaking as the final result (CEA response to CEIOPS ORSA) and, don t forget that it is part of the dialogue with the supervisor Article 45 requires the undertaking to perform a regular ORSA as part of the risk management system. The main purpose of the ORSA is to ensure that the undertaking engages in the process of assessing all the risks inherent in its business and determines its corresponding capital needs. To achieve this, an undertaking must have adequate, robust processes for assessing, monitoring and measuring its risks and overall solvency needs, while ensuring that the output from the assessment is embedded into the decision making processes of the undertaking. Conducting an assessment of the overall solvency needs properly involves input from across the whole undertaking.. * Source: Section I: General considerations No. 4.1. Consultation Paper On the Proposal for onown Risk and Solvency Assessment EIOPA-CP-11/008; 7 November 2011 ORSA is the key element of Solvency II and brings the three pillars together Supervisory Processes in the European Directive (Pillar 2) Governance Supervisory Review Process (SRP) Harmonisation of Supervisory Practices Business Organisation Outsourcing Fit and Proper checking of Board/Key Personnel/sup Board Actuarial Function Capital Early Warning System Risk Management OWN RISK AND SOLVENCY ASSESSMENT (ORSA) Internal Audit Pillar / SCR (Solvency Capital Requirement) Dialoge Audit Dialoge fully satisfactory Assess and review of all processes for compliance with laws, directives and administrative provisions Access and review of the Governance System Evaluatetion of all risk and the ability of the undertaking to assess them SRP Conclusions Supervisory evaluation of on-going compliance with minimum standards and requirements Not fully satisfactory Whole range of prudential measures e.g.: Pillar II add-on Change of Eligible Elements (Amount/Quality) Full/partial Internal Model solvency control levels cooperation between supervisory authorities supervisory methods supervisory tools supervisory powers fit and proper checking peer reviews extension of the scope of the business authorisation of a new insurance undertaking on-going supervision, both on-site and off-site. Limits on eligible assets Source: BaFin: Solvency II-Konferenz, Wasserwerk, Bonn / 20. Juni 2007 12 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 6
ORSA is...... explained by of the German Supervisor (BaFin) For regulatory purpose BaFin: Solvency II-Konferenz, Wasserwerk, Bonn 20. Juni 2007 For purpose of insurer Within the strategic planning the board of directors needs to explain the targets focused on and the implications on the total risk situation Ł Risk; capital; result as the basis of a risk (and value) based management On the way to the ORSA the risk reporting AS IS needs to be extended by some explanations of the mid term planning background and assumptions. The link to the business and the risk strategy should be explained. Qualitative Quantitative 2 Plan to ensure the regulatory solvency capital Explanation of differences in capital requirements SCR calculation 1 5 3 Business plan (How does it affect the internal capital requirements?) Internal capital planning The ORSA does not presuppose the existence of an internal model. If an internal model is available, it has to be included. 4 13 MIMA Conference, December 2 nd 2011 ORSA is... to be seen in conjunction to different other articles of the Directive Article 246 Groups Article 36 Reporting Article 213 Prudent Person Principal Article 45 ORSA & Level 3 Guidance Article 48 Actuarial Function Article 120 Use Test 14 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 7
ORSA is...... complex Acknowledge the Dependencies Business Strategy & Planning Business Strategy Business Plan(s) Performance Targets Risk Tolerance Limits/Risk Appetite Business continuity planning Contingency planning ORSA Process Reporting Decision Making Actuarial Function Modelling (including approved internal model) Capital requirements Technical provisions Stress and scenario testing Projections Risk Management MI & Data Risk Profile Identify, measure, monitor, manage and report short and long terms risks Horizon Scanning Business performance Performance by risk type Type and quality of own funds 15 MIMA Conference, December 2 nd 2011 ORSA is...... a communication challenge! A sufficient ORSA is not possible without working across the functions Board / Executive Risk Management Function Actuarial Function / Finance Setting overall business strategy and risk appetite Engaging with stress tests & scenario results Sign-off of ORSA deliverables Managing the ORSA Process Producing ORSA Report Developing risk reporting templates (with others) Managing scenario testing and (reverse) stress testing Developing risk measurement tools Investigating risk-reward optimisation Stress & scenario analysis / financial projections Strategy / Asset Management Business planning Asset allocation Input on strategic direction External Organisations / Internal Audit Challenge, benchmarking and (independent) review Ensuring appropriate control framework Quality assurance 16 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 8
Implementing ORSA 17 MIMA Conference, December 2 nd 2011 ORSA Key ORSA Challenges: Implementation Requirements ~15% ORSA Methodology & Process ~70% ORSA Vision ` & Policy Development of ORSA vision to identify features and business requirements Define aims and objectives, purpose, identification of key stakeholders, Specify granularity requirements for embedding, frequency of reporting, Agree scope and requisite inputs/outputs, Linkage to other activities, key dependencies Design and build ORSA architecture and process linked to business and risk strategy Define roles and responsibilities for ORSA process Design information and data flow requirement for generating ORSA report from all business departments Design and document process map for ORSA production (allow for dataflow, check/validation points and board input and sign-off) Develop process so that ORSA results are captured in SFCR and RSR Develop a methodology and procedure for explaining and demonstrating an understanding of the extent to which the firms risk profile deviates significantly from the assumptions underlying the SCR (standard formula or internal model). ~15% ORSA Reports 18 MIMA Conference, December 2 nd 2011 Description of business model and the risk profile (long- and short-term) The methodology, assumptions, and justifications in the ORSA results Reconciliation of the ORSA with the SCR (internal model and standard formula) Description of data sources, systems and controls Description of how the ORSA is used in the business (risk management, strategic decisions, operations) Description of risk tolerance limits (Capacity, Appetite and Limits framework) Description of governance system and justification Approval and sign-off by the management or administrative body of the assumptions and results MIMA Conference, December 2 nd 2011 9
Our recommended approach How do we implement and embed the ORSA: The ORSA work-packages Key Input and Enablers ORSA Tasks ORSA Report Risk Appetite and Strategy Risk Profile Business objectives Risk Governance Internal Model Framework Target operating model Economic Capital engine -Data -UR -MR -CR -OR -Validate Process Risk function Input Collate info to ORSA Validate capital output -Assumptions Oversight of the internal model Board Input Validation of Risk Set Risk Appetite Set Performance Target Top Management Set up Governance 19 MIMA Conference, December 2 nd 2011 Define target Operating Model Define, Write and approve ORSA Vision & Policy Define frequency and time horizon for ORSA, how to assess changes in risk profile and metrics to be used Ensure ORSA covers all material risks, both the ones considered in the SCR and other non standard risks (e.g. Reputational, Liquidity) Design and build ORSA framework embedded in the, Governance, risk strategy, capital allocation and in the Operating Model in in terms of - Organisational Structure: Roles of Risk function, operating function, and Committee; Organisational Chart,... - Operational Structure: Value Chain :processes, procedure/methodology and tools for - performing Own Risk Self Assessment - drafting the ORSA Report - Reporting: information and data (Data Modelling) useful to fulfil the Reporting framework to: - perform Own Risk Self Assessment. Some examples of reporting to support the decision making process are: Capital Allocation Reporting, Risk Profile Reporting, Risk limits Reporting, Risk Monitoring Reporting etc. - draft the ORSA Report (Data Modelling) taking into account that the RTS (NOT publicly disclosed) and the SFCR (publicly disclosed) shall include information provided by the own risk solvency assessment - IT system & Tool: Map of IT solutions and tool to run internal models or manage risk factors etc. ORSA Process & Methodology It represents the formalization of the results of the own risk solvency assessment performed by an undertaking and provides mainly a description of: - ORSA Vision - System of Governance and justification - How ORSA is embedded in the decision making process (Risk Strategy, Capital allocation, risk tolerance and operating limits framework) and in the Operating Model - Risk profile (long- and shortterm), the assumptions used and justifications - Methodology used and justification - Internal evaluation of capital needs and Reconciliation of the ORSA with the SCR (internal model and standard formula) - Availability of own funds and matching with criteria of eligibility for SCR - Approval and sign-off process ORSA Part of the Solvency II (fast close) processes Specific reporting processes need to be defined, but because they are situated at the end of the reporting chain they cannot be dissociated from upstream processes. Data sources 1. Data processes Data Collection Data Preparation 2. Calculation processes 3. Valuation of assets and other liabilities Calculation 4. Consol. & aggregation processes Conso. and aggreg. 5. Reporting processes Reporting Life: Contracts and claims Non life / Health: Contracts and claims Asset Data External Market Data Accounting Data Counterparty information Operational Losses Extract Transform and Load Coherence control, validation and sign off Economic Scenario Generation Life Liabilities Model Point Assets Model Point Experience analysis and assumptions setting Coherence control, validation and sign off Cash Flow projection Life Cash Flow projection Assets Cash Flow projection Non-life / Health Life Insurance Risk MVL & Tech Provisions Life Asset Pricing Market Risk MVL & Tech Provisions Non Life and Health Non-life and Health Risk Counterparty Default Risk Risk Class aggregator and consolidation Validation and sign off SFCR & RSR Group SFCR & RSR Solo Internal Reports Results: SII Balance sheet, Capital Requirements Operational Risk 20 MIMA Conference, December 2 nd 2011 Monitor and Control MIMA Conference, December 2 nd 2011 10
ORSA: Vision 21 MIMA Conference, December 2 nd 2011 ORSA Vision The ORSA Vision represents the tool to introduce the ORSA within the Company / Group, therefore it aims at giving guidelines for its implementation, considering the overall objectives the Company wants to achieve and its specific environment (at both Group and Company level) This chapter includes the objectives the Company / Group is willing to achieve with the ORSA Report both at Group and Entity level This chapter aims at defining the scope of the ORSA report and how to apply the proportionality principle to the different entities ORSA Vision This chapter describes how the Company / Group wants to document and communicate the ORSA process This chapter includes a high level description of the overall ORSA process This chapter deals with the risks assessment to be documented in the ORSA report, for both quantifiable and non quantifiable risks 22 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 11
ORSA Vision Structure Scope and Proportionality The ORSA will be structured to consider the application of the proportionality principle, in order to set up an adequate process which will fit the nature, scale and complexity of the risks profile managed by each single entity part of the Group EEA Entities Non EEA Entities Level 1 ORSA Level 2 ORSA Level 3 ORSA The Group could decide to apply the proportionality principle in order to make the performance of the ORSA the most adequate for its entities, in order to avoid an undue workload. Different criteria could be applied for the determination of the different levels of the ORSA, i.e. Inclusion in the Internal Model EEA / Non EEA entity Amount of premiums / reserves Amount of Economic Capital PROPORTIONALITY 23 MIMA Conference, December 2 nd 2011 ORSA: Methodology 24 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 12
The ORSA methods Elements to develop : focus on quantitative aspects Process Tools Objectives Identify risks Identify business risks, describe and quantify them (intuitive risk approach) Identify major risks for the company Exposures dashboard : Risk metrics, included those not included in the standard formula: strategy, reputation, concentration, 25 MIMA Conference, December 2 nd 2011 Compute risk profile and solvency margin Determine the ORSA capital (Economic capital) Check adequacy of standard formula/internal model ORSA economic capital calculation: confidence level, type of calculation, calibration of stress tests, consistency with the standard formula or internal model Enhance a prospective view on risks and solvency Link strategic vision and risk management Prospective view of risks and solvency Capital adequacy and risk mitigation measures Projection assumptions: economic and technical assumptions, stress tests and scenarios planning, ORSA Strategic plan Manage risk profile Compliance with risk appetite Monitoring significant changes in the risk profile Continuous monitoring of compliance with solvency requirements and ORSA capital Monitoring indicators: proxy for ongoing evaluation of the solvency depending on the sensitivity of ORSA capital to these indicators, consistency of bottom-up and topdown vision, Use test : ALM, profitablity, underwritting, reinsurance,. Risk appetite (Risk strategy and policies) Monitor and manage risks Incorporate risk in daily management, particularly in terms of operational limits or warning thresholds Establish risk policies Risk monitoring reporting: Operational limits monitoring for each indicator, Strategic plan/projection assumptions followup, montoring of warning threshold and actions to be implemented Reporting The ORSA methods Projection The ORSA must include the assessment of the Overall Solvency Needs of the Company / Group on a forward looking basis. This means that the Solvency Position must be projected on a selected time horizon (normally the one used in the strategic planning) Year t 0 Year t 1 Year t 2 Year t 3 Own Funds Solvency Ratio Own Funds Solvency Ratio Own Funds Solvency Ratio Own Funds Solvency Ratio The dimension considered in the assessment could be also split into Analysis per risk category Analysis per BU (for Groups) Analysis per LoBs Economic Capital Economic Capital Economic Capital Economic Capital Actual Risk Profile Projected Risk Profile 26 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 13
The ORSA methods Projection ORSA requires that the undertaking s overall solvency needs are met at all times over the strategic plan s time horizon. Revenues Central scenario(s) Stress test(s) 0 1 2 3 Year Calculation kernel Calculation kernel Calculation kernel Calculation kernel Surplus Surplus Surplus Surplus Assets SCR BE + risk margin Assets SCR BE + risk margin Assets SCR BE + risk margin Assets SCR BE + risk margin Regulatory economic balance sheet Ł Are the capital needs still covered? Which recapitalisation strategy to consider? Ł Is the undertaking s risk profile still acceptable? Ł Are the capital needs still covered? Which recapitalisation strategy to consider? Ł Is the undertaking s risk profile still acceptable? Ł Are the capital needs still covered? Which recapitalisation strategy to consider? Ł Is the undertaking s risk profile still acceptable? 27 MIMA Conference, December 2 nd 2011 The ORSA methods Stress testing and Scenario planning Beyond stochastic models Some confusion on terminology Use results to draw useful conclusions Regulators and market participants have come to realize the limitations of stochastic models. Thinking through scenarios and stress levels, on a partly judgmental basis, is considered key to fully understand risks Scope of stress testing in ORSA is larger than usually thought: Sensitivity measures: impact of a move in one particular risk driver, the source of the shock not being identified; Scenario analysis: assess ability to absorb exceptional but plausible events with simultaneous moves in a number of risk drivers; Scenario analysis through time: essentially capital planning simulation for a most-likely non stressed scenario. Is the undertaking able to absorb such an event? How is the risk and capital structure altered in the long run? Are the limits, targets or objectives of the risk appetite still met? What are the answers we can provide to identified solvency issues? 28 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 14
The ORSA methods Non Pillar I Risks: Example of assessment / management methodology Liquidity risk Liquidity Risk framework based on Liquidity risk assessment (at both Group and Entity level) Liquidity contingency plans Liquidity Risk assessment based on the excess liquidity, the difference between Available liquidity resources Required liquidity On the above dimensions stress tests are performed, including Distressed financial markets (asset price and liquidity) Confidence crisis (increased lapses, decreased premiums, no new business) Natural catastrophes (windstorm, flood, etc.) Liquidity Risk managed also with monitoring of the Group debt position Strategic risk Strategic Risk framework based on three principles Screening of the strategic and competitive environment Reviews of consistency and relevance of strategy Dialog between entities and the Group Strategic Risk assessment based on different processes, on which the above principles are applied Competitor s review Growth benchmark Portfolio review Strategic plan Emerging risk analysis Quick screen Ad hoc strategic studies Strategic Audit reviews Strategy conferences & Management training Recommendations and issue arising from the above assessment are considered in the strategic planning Reputation risk Reputation risk management aims to three main objectives Proactively manage reputation risk Define accountability for reputation risk across the organisation Implement proactive reputation risk management, which consists of 1. Identification of risks Made through the monitoring of traditional media and social media, existing surveys and reports of key stakeholder groups and identification of issue or negative perceptions 2. Prioritization of risks Based on a set of variables and a formula which allow to obtain the sensitivity of any issue identified 3. Mitigation of risks Based on proactive management of the issue identified 4. Crisis communication Based on a set of procedures and a communication handbook 29 MIMA Conference, December 2 nd 2011 ORSA: Process 30 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 15
ORSA Process ORSA ERM: There is no real difference Business & Risk Strategy Risk Tolerance & Appetite Stress- & Scenario Testing Risk Culture Risk Identification Monitoring & Reporting Risk Measurement 31 MIMA Conference, December 2 nd 2011 ORSA Process The link with strategic plan The strategic plan process and ORSA are to be closely coordinated Planning phase Permanent management of the risk profile Implementation phase No go : strategic plan review Risk profile Mission statement Risk appetite Strategic plan Risk tolerance and capital needs Operational plan (KPI) Risks limits (KRI) Capital allocation and funding Solvency valuation No Plan ok.? ORSA Report Plan implementation (KPI) Risks monitoring (KRI) Qualitative analysis (Independent) review Own risk assessment Link to the Internal Model 1) Solvency margin requirements Permanent respect of regulatory solvency requirement Financial communication 32 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 16
ORSA Process Roles and responsibilities Risk Committee ORSA policy approval ORSA sign-off and use in decicision making Management Board and/or Board of Directors Risk Management Process design & implementation (Independent) Review Internal Audit Risk Management, Strategic planning & other key functions Process running & output production Result validation Risk Committee Risk Management Process validation 33 MIMA Conference, December 2 nd 2011 ORSA Process Comparing existing processes Integrating ORSA into business planning Advanced companies will have an ICA projection incorporated into their business planning cycle. This is often at the end of the process as a check that the plan can be supported with existing capital. Standard planning cycle July August September October November December January February Business unit plans Consolidated group plans Management oversight Capital modelling Board approval Source: Groupe Consultatif 34 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 17
ORSA Process Comparing existing processes ORSA means that capital modelling and management oversight should be integrated into the planning cycle at a much earlier point of time. ORSA planning cycle July August September October November December January February Business unit plans Capital modelling Consolidated group plans Group capital modelling Management oversight Board approval Source: Groupe Consultatif 35 MIMA Conference, December 2 nd 2011 ORSA: Documentation & Report Design 36 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 18
ORSA Report Documentation; Documentation; Documentation 37 MIMA Conference, December 2 nd 2011 ORSA Report Content overview In our experience, the ORSA report covers the following topics: Executive Summary Risk management system Overview of ORSA methodology and process ORSA process and methodology for quantified risks ORSA process and methodology for other material risks ORSA results Actions to meet capital requirements over the period Independent validation Review and sign-off 38 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 19
ORSA Report Flow of activities Definition of the structure of the Report Identification and definition of enablers ORSA Report process design ORSA Policy Definition of the table of content of the ORSA Report and definition of a ORSA Report Mock Up Performance of interviews with all areas involved in the ORSA Report production in order to identify all the information needed and all processes who manage them Identification of the workflow of activity to fill out the ORSA Report and definition of guidelines for its completion Definition of the ORSA Policy as part of the overall Risk Management System of the Group 39 MIMA Conference, December 2 nd 2011 ORSA Report Impact on the management of documentation The end of the ORSA-Process is the ORSA-Report. What is the beginning? What is the general framework? Which documents are required by ORSA? Strategies Other guidelines ORSA-Vision & Policy Inputs ORSA Report 40 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 20
ORSA Report Requires a stable basement ORSA means, ensuring the existence and an appropriate design of these documents and starting measures, if gaps occur. ORSA-Report ORSA- Compliance ALM Strategy Vision Investment Mission Outsourcing Remuner. Compliance Plan Investment Strategy Risk Accumulation- Business Strategy Fit & Proper ALM Data quality Reinsurance Strategy Reserving Risk Strategy Risk management Audit Rating Docu. & Info Credit risk Strategy Corporate Governance Reinsurance Audit Plan Derivate/SPV Op-Risk Underwriting/ Reserv. Strategy Claim management Code of Ethics Underwriting Int. Control Liquidity Emergency Quantitative long-term planning Rules of Procedure 41 MIMA Conference, December 2 nd 2011 ORSA in Practice 42 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 21
ORSA and the Use Test The overlap ORSA Use Test Business Planning Capital Management Review of Risk Appetite Statements Risk profile incl. all material risks Risk measurement & assessment processes Management actions & decisions Quantity & quality of own fund... Source: GIRO 2010 43 MIMA Conference, December 2 nd 2011 Use Test for the internal model Several examples of the usage of the internal model Governance system Risk management system Decision process Capital judgment and assignment Link between the internal model and the technical provisions Link between the output of the internal model and the external reporting Link between the internal model and the technical implementation of the actions of the management Measurement of material risks ALM External risk reporting Internal risk reporting Design of the reinsurance program Development of the risk strategies Efficient usage of capital Investment decisions Determination of the targets for return on capital and rewards Product development and pricing Business planning and strategy Policy for the underwriting of insurance policies Capital management ORSA Calculation of the SCR Assignment of economic capital per entity, business line risk of business line Assignment of solvability capital per entity, business line, risk of business line 44 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 22
ORSA & Use test Deliverables High level examples of ORSA dashboard output 1. Balance Sheets 2. Profit & Loss 3. Risk Capital Summary solvency position Projections of technical provisions, net assets, etc. Analysis of change Scenario analysis... Future profit projections by line of business on an annual or monthly basis... Risk capital by risk class Diversification benefits Reconciliation of internal model SCR and economic capital... 4. Earnings & Cash Flows Best estimate, optimistic and pessimistic scenarios Projected earnings What if scenarios... 5. Risk Profiling Ongoing monitoring and capture of risk data Analysis of risks not adequately captured in the SCR... 6. Performance Measurement Analysis against KPIs... 45 MIMA Conference, December 2 nd 2011 Summary 46 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 23
Points to consider for an ORSA A clear, logical and documented ORSA should cover & consider: What is the current state of your business (results, SCR, etc)? What are you doing about it (responsibility; control & mitigation, processes, Data)? Do you have the right people in place (fit & proper)? What are your business risks, your risk appetite, the limits? What is material (impact on current capital)? Do you have enough capital (to cover all risks today and tomorrow)? What is included? What is excluded? Why? (Group effects etc.) Why are you following this approach (evidence & documentation) What are your plans (continuous view on the business)? What might be the range of outcomes & costs (stress tests/scenarios)? How can/will you cope with such outcomes (capital sources)? When do I have to review my position (triggers)? How have things changed (from last review)? 47 MIMA Conference, December 2 nd 2011 2011 B&W Deloitte GmbH Questions... last chance to participate in the consultation until January 20 th 2012... https://eiopa.europa.eu/consultations/consultation-papers/index.html 48 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 24
Contact Claus Brinkmann Partner Actuarial & Insurance Solution B&W Deloitte GmbH Rosenheimer Platz 4 81669 München Deutschland Tel: +49 (0)89 29036 8540 Mob: +49 (0)172 2463 513 cbrinkmann@deloitte.de www.deloitte.com/de Member of Deloitte Touche Tohmatsu 49 MIMA Conference, December 2 nd 2011 ORSA: Appendix 50 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 25
ORSA across Europe A benchmark about the ORSA Report The panel of this benchmark comprises 13 companies across Europe and has been collated on the basis of our internal knowledge rather than any direct contact with the organisations in question Main themes covered in our benchmark are Frequency Nature Content / Themes Timing of production Engagement in design Length 51 MIMA Conference, December 2 nd 2011 Frequency 1/2 How often the ORSA will be produced The majority of the companies analysed plan to produce their formal ORSA annually. Less than 10% expect to produce a monthly ORSA Report The majority of the companies analysed expects to also use regular Risk Management Indicators (or similar) to support the annual ORSA 52 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 26
Frequency 2/2 Use of other Risk Management Indicators reports No Yes 69% of the firms anticipated that more frequent reports will be used to communicate risk and solvency MI 22% of the panel specified that this will have a monthly frequency with 67% of this sub-sample not known or to be determined 53 MIMA Conference, December 2 nd 2011 Nature Use of other Risk Management Indicators reports 77% of the sample intend to use a combination of both static and dynamic information within their ORSA reports. Among the remaining 23%, only one firm intends to focus on streamlining the ORSA by removing as much static information as possible. Over two thirds of the sample plan to take advantage of "Group ORSA" report to write a single ORSA report for entities contained within the Group 54 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 27
Contents / Themes What is included in the ORSA Reports Key Themes Over two thirds of firms have these as key themes to the ORSA report 62% of the panel plan to feature decision making in the ORSA Report 50% of respondents plan to include information on Model Governance 38% of the firms plan to include information on their business strategy less than a quarter anticipate information on organisational change 55 MIMA Conference, December 2 nd 2011 Timing When the ORSA will be performed Unknown / To be determined 33% Year End 15% Aligned with Planning Process 52% Around 51% of the panel will be aligning the production of the ORSA report with their annual planning process as opposed to just 15% planning to perform this at Year End. One third of the sample is either unknown or to be determined 56 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 28
Engagement in design 1/2 Who has been engaged Interestingly none of the sample have engaged their CEO in the design of their ORSA to date. About three quarters have actively engaged the risk function in the ORSA design. Less than half have engaged finance and just over half have engaged 1st line stakeholders 15% of the sample have engaged the Board in the design of their ORSA, however 46% of the sample have engaged their Board Risk Committee. In 92% of the sample the CRO has already been engaged in the design of the ORSA to date. 57 MIMA Conference, December 2 nd 2011 Engagement in design 2/2 How the Board engagement is expected to be evidenced The position is mixed over how Board engagement in the ORSA is expected to be evidenced. 38% of the sample plan to use meeting minutes, 38% signing the ORSA off based on a full review of the report, 23% to sign off based on a "light" review of the ORSA. On the latter, only one anticipates this would be based on information contained on the ORSA in other disclosures 58 MIMA Conference, December 2 nd 2011 MIMA Conference, December 2 nd 2011 29
Length How long will be the ORSA Report Only 1 firm expects the ORSA report to be less than 40 pages in length (11-20 pages). 62% of the sample anticipate the ORSA report between 40-100 pages long (31%, 41-60 and 31% 60-100 pages). Only 1 firm respondent was expecting a report length to be over 100 pages 59 MIMA Conference, December 2 nd 2011 About Deloitte Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 140 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte s approximately 169,000 professionals are committed to becoming the standard of excellence. Deloitte s professionals are unified by a collaborative culture that fosters integrity, outstanding value to markets and clients, commitment to each other, and strength from cultural diversity. They enjoy an environment of continuous learning, challenging experiences, and enriching career opportunities. Deloitte s professionals are dedicated to strengthening corporate responsibility, building public trust, and making a positive impact in their communities. Deloitte refers to one or more of Deloitte Touché Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. 2011 B&W Deloitte GmbH MIMA Conference, December 2 nd 2011 30