Own Risk and Solvency Assessment (ORSA)
Last updated:
13/08/2010 15:56
The ORSA is a new internal risk assessment process, which aims to capture non-quantifiable risk where capital is not necessarily the best measure. It is briefly defined in Article 44 of the Level 1 Directive and there has also only been some limited guidance so far, as the ORSA in not part of the Level 2 implementing measures. For this reason, CEIOPS published an issue paper in 2008 providing more details and definition to the process. The paper defines the ORSA 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”. This process is a key part of the Pillar 2 requirements, which are intended to complement and not replace the Pillar 1 capital requirements. Whilst the focus of Pillar 1 is more on how the business is managed today, Pillar 2 will be more forward looking. It will consider a wider range of risk issues than will be considered under Pillar 1.
Firms are expected to apply the following five principles in a proportionate manner in order to assess their own risks and solvency needs:
1. The ORSA is the responsibility of the undertaking and should be regularly reviewed and approved by the undertaking's administrative or management body.
2. The ORSA should encompass all material risks that may have an impact on the undertaking's ability to meet its obligations under insurance contracts.
3. The ORSA should be based on adequate measurement and assessment processes and form an integral part of the management process and decision making framework of the undertaking.
4. The ORSA should be forward-looking, taking into account the undertaking's business plans and projections.
5. The ORSA process and outcome should be appropriately evidenced and internally documented as well as independently assessed.
Although firms will be required to apply more sophisticated methods for the ORSA, CEIOPS highlights that the process does not require the development of an internal mode. Furthermore, it is most likely that firms would be left to decide if the independent assessment of the ORSA should be done internally or externally. In the UK, the ORSA will have many parallels to the internal capital assessment (ICA) regime and the Advanced, Risk-Responsive, Operating frameWork (ARROW) process, but the quantitative reporting requirements are expected to be much higher.
CEIOPS will publish further details to the ORSA process in its Level 3 advice most likely in early 2011. We expect that this advice will provide additional information to the interaction between the ORSA and internal models. FSA have made clear that they will be expecting a ‘pro-forma’ ORSA to accompany the internal model application, where firms should submit the results of the latest own risk and solvency assessment and details of the business and risk strategies.