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White Paper

Practical considerations for ORSA modelling

Company: IBM Business Analytics

IBM Business Analytics  case study

Category: Solvency II

Published: 02 June 2014

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Overview

The Forward Looking Assessment of Own Risk (FLAOR) or Own Risk and Solvency Assessment (ORSA) has been one of the more successful areas of Solvency II implementation; both UK and European regulators expected insurers to be prepared to implement their ORSA from 1 January 2014. In addition to the significant progress of Solvency II in 20132, the utility of the ORSA has also seen its popularity grow across multiple regions worldwide, with the skills and analysis accepted by most insurers as valuable to their business.

There are parallels between the ORSA and the experience of UK firms in implementing the Pillar 2 - Individual Capital Assessment (ICA). The ICA regime required firms to improve their approaches to measuring and quantifying risk-many UK firms are now well-advanced in their ICA development and have obtained recognisable benefits. In conjunction with this, many firms also substantially evolved their modelling capability to support the analysis. We believe companies will be able to use that experience for the ORSA going forward and expect that further impetus will be given to the industry's modelling capability to capture more accurately how a firm's risk exposure evolves over time or changes in different environments.

This paper outlines three key areas of the ORSA requirements, for which we observe a need for further improvement to actuarial modelling techniques. The ORSA guidance establishes that an ORSA report should contain analysis that includes:

a) A forward looking assessment of risk and solvency levels for future years (Balance sheet projection capability);
b) An ability to report on the monitoring of solvency on a continuous basis (Solvency Monitoring);
c) A sufficient analysis of risk through tools such as Stress, Scenario and Reverse Stress Testing.

Benchmarking insights highlight the varying degrees of sophistication between market participants in the three key areas identified. Firms may be expected to move to a more mature approach that could require increasing capabilities if their methodology has been identified as insufficient. We believe firms need to address these areas to fully satisfy the ORSA requirements as well as ensuring that the ORSA adds value in regards to business planning and decision making.

This paper is focused on small and medium sized insurers and in parallel to expanding on the three requirements above, we present a discussion outlining some of the different actuarial modelling techniques firms could use to deal with the increased expectations for the ORSA. Similar to the ICA, the underlying principles of the ORSA will remain the same for each firm. It will be important for each firm to develop the right approaches that are proportionate to their firm.

 

 

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