Linking ORSA and business planning Embedding risk in decision making May 29 th 2013 IRM
Agenda 1 Regulatory Context 2 Policy, Process, Report and People 2
1 1 Regulatory Context 2 Policy, Process, Report and People 3
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2 1 Regulatory Context 2 Policy, Process, Report and People 6
ERM and ORSA Report Governance and Oversight Strategy and Planning Risk Strategy and Appetite Risk Policies Risk Evaluation - Actuarial & Qualitative Risk Capital Model External Reporting Internal Reporting O R S A R E P O R T Business Risk Management Comprehensive Control Concept 7
AZUK ORSA Approach The EC Directive Text formed the basis of the AZUK Solvency II Programme from its inception in 2009. Article 45 ORSA particularly formed a prominent part of the definition of the to-be Enterprise Risk Management framework / ORSA process. The majority of activity being undertaken on the AZUK Solvency II Programme is directly relevant to the ORSA in some way. The specific components of ORSA being produced by AZUK in line with regulations, FSA input and AZSE minimum standards are: ORSA Process ERM Framework / ORSA Process ORSA Documentation ORSA Policy / ORSA Process Doc ORSA Report as per MSORSA and FSA input AZUK s Management Board have taken an active part in reviewing how the ORSA process will work. 8
What is ORSA? A process Delivered by the ERM system design Periodic, and after pre-defined events which potentially affect our risk profile significantly A state of mind We always consider risk as part of decision-making, and evidence the fact A report Reported by the Risk department to the Board; summaries go outside An outcome Our plans are consistent with our Risk Appetite, we are adequately capitalised on the basis we choose as well as on a regulatory basis, and we will continue to be so over the planning horizon Examples of possible pre-defined events We buy renewal rights to a 100m book of business We close down a trading division The UK government defaults There is an Ogden table change 9
Why the ORSA is important Additional risks Risk culture Forward looking Continuous capital The internal model may not cover all material risks you are actually exposed to. One must assess the adequacy of the regulatory capital requirement to the individual risk position. The matching of the own funds to the risk profile should help promote a strong culture of risk management, which in turn is a key underlying feature of the ORSA process and, more widely, in soundly running the business The ORSA provides a forward-looking perspective. With changes in the risk profile of translating into changes of overall solvency needs, the assessment needs to link to external factors or the business plans in the longer term. Performing the ORSA will help to ensure that we continuously meet the regulatory capital requirements, as well as the internal capital targets. Supervisory comfort If the supervisory authority discovers issues that should have been determined in the ORSA, not only must the supervisor take action according to the deficiencies but it also has to assess the reason why the issues were not identified by the undertaking itself. The ORSA represents the firm s opinion and understanding of its risks, overall solvency needs and own funds 10
ORSA process Internal Model Top Risk Assessment Stress and Scenario Analysis Other risk identification and analysis processes Record of ORSA process Detailed, c. 60 pages, produced for CRO by risk team Required ORSA documents ORSA Board report High-level, produced by CRO for Board 1. Board report sufficiently detailed to be useful in strategic decision-making 2. Regulatory report FSA strongly hint the Board report should have a dual role 3. Record of ORSA process 4. ORSA process documentation and policy 11
ORSA requirements reflect good capital planning requirements ORSA Principles Principles of good capital planning 1. ORSA needs to be regularly reviewed and approved by the undertakings management body 2. It shall encompass all material risks that may have an impact on the undertaking's ability to meet its obligations under insurance contracts 3. It shall 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. It shall be forward-looking, taking into account the undertakings business plans and incorporate stress scenarios 5. The ORSA process needs to be appropriately evidenced and internally documented Good understanding of current position (all dimensions) Capital roll-forward / reconciliation of changes to business decisions & market impact Sensitivities to market and non-market risk known and managed accordingly Readily available list of contingency measures 6. The ORSA process is required to govern the ORSA process ORSA is the processes and procedures within risk framework to ensure solvency needs are met at all times and is the ultimate responsibility of the Board. 12
In order to support the ORSA, we have developed a dedicated projection and stress tool ORSA Requirements Must project Solvency II capital needs over a multi-year period Must allow for likely changes in risk profile and business strategy Projection Tool solution Projection over planning period Asset mix % and new sensitivities affect risk capital Should quantify risk for a sufficiently wide range of outcomes Stress tests, sensitivity analysis and scenario analysis need to be fed into the ORSA Possible outcomes for the business plan must be tested Reverse stress testing should be part of the ORSA process Pre-defined and additional scenarios Results to be used in the Planning Framework (linked to ORSA process) Ability to adjust key planning parameters as required Reverse stress tests results analysed 13
ORSA forms a bridge with the Business Plan Risk and Capital Management is key to establishing a balance between optimising Risk and Reward a key determinant in the Plan Risk Appetite is both a driver of, and is driven by, the business strategy The internal model is run to provide a regulatory capital forecast on the assumptions within the plan The Business Plan is refined through a review process and the internal model run in parallel to provide updated forecasts Capital is allocated to LoB for steering and planning purposes Business Plan needs to be sufficiently stressed Simulate stressed situations and assume control failure occurs Validate the model through testing of scenario scope and key assumptions Allow for a time delay between events occurring and management action taking effect Reconcile all stressed simulations back to the agreed risk appetite. 14
AZUK ORSA Report 1. Exec summary - including ORSA Outcome & High-Level Follow Up on Previous ORSA 2. Brief ORSA process description - Largely static description of ORSA Process. 3. Risk and Solvency Assessment - Key outcomes of SIRA assessment, - commentary on TRA risks concentration/aggregation/accumulation risks; - adequacy of technical provisions; sister company and Group risks. - Numbers and commentary relating to: high level plan summary; capital assessment across planning horizon; - breakdown of results by line of business/ risk type; - projected position against risk appetite and stress tests; an assessment of the model and its weaknesses 4. Validation - Commentary relating to model governance and validation of the ORSA process and outcome 15
ORSA Content selected elements 1. ORSA Executive Summary a. Outcome Review b. Previous ORSA Update c. ORSA Record 2. Management Actions a. General Management Actions b. Contingency Management Actions for Worst Case Scenarios c. Contingency plans for solvency ratios below 100% 3. Business Strategy; Risk-return trade off a. Key Risks b. Solvency needs c. Differences between risk profile and SCR assumptions d. Risk Strategy and Appetite e. Risk Assessment, risk tolerance and capital allocation f. Management Body challenge g. Approval status for the internal model 16
ORSA Relationship with Internal Model and Standard Formula SCR Risks not considered by standard formula Aspects varying between business and regulatory (SCR) models Own Risk and Solvency Assessment (ORSA) Liquidity risk Reputational risk Strategic risk Time horizon Confidence level Management actions Stress and scenario tests Risks Liquidity, Reputational and Strategic risk are not included in the standard formula. If these represent a material risk they need to be included in the ORSA Time horizon The time horizon used for business planning may differ from the time horizon for regulatory capital by internal model Confidence level A different confidence level to the SCR internal model may be used, e.g., rating confidence level Management actions Consideration should be taken of any agreed management actions that could influence the risk profile Stress and scenario tests Should be extensive in business planning for internal purposes ORSA includes assessment of capital requirements for risks that are not captured in the internal model or that could arguably modelled differently Page 17 17
Thank you for listening. Are there any questions? 18