THE ORSA AND WHAT SHOULD SMALLER FIRMS BE DOING NOW?

Transcription

1 AFM 26 MAY 2010 THE ORSA AND WHAT SHOULD SMALLER FIRMS BE DOING NOW? FRAMEWORK AND EMERGING SOLVENCY II BEST PRACTICES Philip Simpson Milliman

2 Agenda The Framework Directive The Consultation Papers 2008 Issues Paper Key Issues Delivering the ORSA Current Actions Milliman

3 ORSAs Milliman

4 The Framework Directive Article 45 The ORSA should: Consider the company s overall solvency needs Take into account the risk profile Consider risk limits Take into account the company s strategy Consider continual compliance with capital requirements The ORSA should consider the significance of differences in risk profile in the SCR and the company s actual risk profile Milliman

5 The Framework Directive Article 45 (continued) The risk identification processes should: Identify and measure long term and short term risks Consider both actual and potential risks Future changes in economic conditions should be considered The ORSA must be integrated into the company s strategy. The ORSA should feed into strategic decisions The company should report the results of the ORSA to its supervisor Milliman

6 The Framework Directive Article 250 There needs to be a Group ORSA as well as business unit ORSAs The Group ORSA will be reviewed by the Group supervisor A single ORSA report covering the group and the solo submissions may be allowed Milliman

7 The Consultation Papers Milliman

8 The Consultation Papers CP 33 Companies must perform an ORSA The ORSA must capture all risks around investments The ORSA should assess the effectiveness of any financial risk mitigation techniques, taking into account its desired risk profile CP 56 The ORSA could use an internal model It should consider all material risks Milliman

9 The Consultation Papers (continued) CP 58 The SFCR must show: The process used How it is integrated into the risk management process How it is integrated into the decision making process The RTS (the private submission to the regulator) requires extra disclosure the prove the company fulfilled it ORSA obligations CP 66 The parent company in a group must perform a Group ORSA Milliman

10 CEIOPS issues paper Published 2008 From a risk point of view the key components of an ORSA are to: Identify risks Assess risks Monitor risks Manage risks The relation between different risks is key The ORSA should consider: Current risks Projected future risks Current solvency Projected future solvency Milliman

11 CEIOPS issues paper Continued There are a number of reasons why the undertaking may consider capital requirements other than the SCR. These include: The company may use a different confidence level in the ORSA The company s risks may be different to those in the SCR. For example, reputation risk strategic risk may not be part of the SCR but part of the ORSA The ORSA may use a different time horizon There may be different assumed management actions in the ORSA and in the SCR Milliman

12 CEIOPS issues paper Miscellaneous points There should be independent review of the ORSA The ORSA should be at least annual, and follow any major change to risk profile A higher level of capital in the ORSA than in the SCR will not necessarily result in a capital add on There are minimum documentation standards Milliman

13 Key Issues Current lack of guidance Companies may have a legacy of multiple models and multiple risk metrics Formulating a clear risk strategy Modelling the interaction between risks Embedding the ORSA into strategy, such as business plans and decisions Identifying risks and unknown unknowns Milliman

14 Delivering the O R S A Think about the phrase in two parts: : Need to assess your risks : Need to assess the capital consequences of your risks Two important clarifications: ORSA is NOT just a bigger SCR calculation The result of an ORSA is NOT just a number Some thoughts on how to get these right: See the whole picture Square pegs and round holes Emerging risks Milliman

15 Seeing the Whole Picture The ORSA is about...enhancing awareness of the interrelationships between the risks an undertaking is currently exposed to, or may face in the long term, and the internal capital needs that follow from this risk exposure... CEIOPS-IGSRR-09/08 A typical framework is actually looking at aggregations of risk characteristics not risks Milliman

16 Seeing the Whole Picture Systems view says that the whole cannot be explained by studying parts in isolation Subtle but very important shift in thinking interactions are not nice to include...they are essential Risk tools normally focus at this level Need to focus here Milliman

17 Typical Approach To Risk Identification A single-characteristic approach is not sufficiently granular This leads to the heterogeneity which causes problems with typical models/analysis Milliman

18 Emerging Risk Would best-practice processes have considered this? Probably not But they would have known that a disruption in air travel mattered, so plans would be in place for that Knowing what matters to your risk profile helps you to know when something new is important Milliman

19 Summing up the ORSA The ORSA essentially requires you to have ERM It specifies some minimum requirements for that ERM Modelling challenges: multi-year; new business; all risks;... But also more profound: What is your risk profile and how does/might it change? What is the link between risk profile and own funds? The organisation has to want to take and manage risk Formal consideration of risk interactions Best practices are coming from outside financial services in many areas Milliman

20 Current Actions (1) Finishing GAP analysis Cross check against the most recent requirements for example the Level 3 consultation papers as they emerge and the QIS 5 technical specification Internal Model Finalise decision on standard or (partial) internal model If an internal model get involved with the pre application process for Internal Model Approval (see FSA April 2010 publication) Milliman

21 Current Actions (2) Complete the Pre Application Qualifying Criteria Template Prepare for QIS 5 Plan adequate time and resources Review GAP output in light of QIS 5 Look wider than the numbers (Pillar 5 (2 + 3)) governance, systems, data, documentation public disclosure etc Milliman