This slide deck was designed to accompany a video webcast that included an interactive discussion by a moderator and three panelists. To view that webcast, please go to: http://bit.ly/15ptEPD
ORSA opportunity: compliance and business value
Origination date: 15 October 2013
Forward-looking insurers are moving beyond a strictly “check the box”/compliance-driven attitude regarding Own Risk and Solvency Assessment (ORSA) requirements. For many, ORSA strategies drive business opportunities, such as boosting existing enterprise risk management (ERM) practices.
Join our panel of ORSA and ERM professionals, moderated by Bill Spinard, Insurance Risk Advisory Services Practice Leader, Ernst & Young LLP, for an interactive discussion on approaches to ORSA compliance that are also effective business strategies.
The panel will take questions from the webcast audience, and real-time polling during the event will give you an opportunity to learn how your organization compares with others.
Topics include:
· Defining ORSA and what it means for your firm
· Assessing your firm’s readiness and current ERM capabilities
· Addressing common implementation gaps and challenges
· Aligning ORSA compliance to long-term business value
You are welcome to join the on-demand version of this interactive discussion and learn about how ORSA compliance can lead to effective business strategies, by going to: http://bit.ly/15ptEPD.
This webcast is part of an ongoing series. Register for any webcast and you will be asked if you want to receive invitations to future webcasts.
3. Today’s presenters
Moderator:
Bill Spinard
Ernst & Young LLP
Presenters:
Chad Runchey
James Collingwood
Ernst & Young LLP
Page 3
Adam Walter
Ernst & Young LLP
Ernst & Young LLP
The ORSA opportunity: compliance and business value
4. Today’s agenda
►
Background and regulatory update
►
ORSA overview
►
Industry perspectives
►
Achieving long-term business value
Join today’s Twitter discussion:
Page 4
#EY_ORSA
The ORSA opportunity: compliance and business value
5. Fact check
What industry or industries do you focus on?
A.
Property casualty
B.
Life
C.
Health
D.
Other
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The ORSA opportunity: compliance and business value
6. Today’s agenda
► Background
and regulatory update
►
ORSA overview
►
Industry perspectives
►
Achieving long-term business value
Join today’s Twitter discussion:
Page 6
#EY_ORSA
The ORSA opportunity: compliance and business value
7. Background and regulatory update
Own Risk and Solvency Assessment (ORSA) per the US NAIC*
► Definition
►
►
“an internal assessment… conducted by [the] insurer of the material and
relevant risks associated with an insurer’s current business plan and the
sufficiency of capital resources to support those risks”
Primary goals
►
►
►
To foster an effective level of enterprise risk management at all insurers
through which each insurer identifies, assesses, monitors and reports on
its material and relevant risks, using techniques that are appropriate to the
nature, scale and complexity of the insurer’s risks, in a manner that is
adequate to support risk and capital decisions
To provide a group-level perspective on risk and capital, as a supplement
to the existing legal entity view
Other jurisdictions with an ORSA process include
►
Bermuda, the European Union and Canada
* National Association of Insurance Commissioners
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The ORSA opportunity: compliance and business value
8. Background and regulatory update
►
ORSA Summary Report – highlights
►
►
►
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Section 1: Description of Insurer’s Risk Management Framework
Section 2: Insurer’s Assessment of Risk Exposure
Section 3: Group Risk Capital and Prospective Solvency Assessment
ORSA Summary Report – expectations
►
Annual reports due starting in 2015
►
►
►
►
►
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Exemption criteria for smaller insurers/groups
No specified report date, NAIC states it will be dependent on when ORSA
is performed
Can utilize ORSA reports prepared for other jurisdictions
Should facilitate a more in-depth review by the regulator through analysis
and examination processes
Horizon for key risks and capital adequacy should align with business plan
(e.g., 1-3 years)
The ORSA opportunity: compliance and business value
9. Background and regulatory update
State adoption
► To date, the Risk Management and ORSA Model Act has been fully or
substantially adopted by:
►
►
►
►
►
►
►
►
Iowa
Maine
New Hampshire
Rhode Island
Vermont
California
The Risk Management and ORSA Model Act was considered by
legislatures in other states in 2013 (CT, OH, PA, TX, VA, WY)
The NAIC has advocated for full and uniform adoption of the model
act by states during the 2013-14 legislative sessions
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The ORSA opportunity: compliance and business value
10. Fact check
How would you assess the current state of
readiness at your company?
A.
Ready for regulatory submission
B.
Have all of the capabilities – just need to put the
report together
C.
Understand the gaps and have a plan to close them
D.
Understand the requirements and potential gaps
E.
Unclear on requirements or state of readiness
F.
Does not apply (EY, faculty, alumni, other)
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The ORSA opportunity: compliance and business value
11. Today’s agenda
►
Background and regulatory update
► ORSA
overview
►
Industry perspectives
►
Achieving long-term business value
Join today’s Twitter discussion:
Page 11
#EY_ORSA
The ORSA opportunity: compliance and business value
12. ORSA overview
ORSA requirements
Description
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•
•
•
•
•
Section 2:
Assessment of risk
exposures
• Documentation of quantitative measurements of risk
exposure in both normal and stressed environments
• Quantification of risk exposure under a range of
outcomes using risk measurement techniques that
are appropriate to the nature, scale and complexity
of the risks
• Detailed descriptions and explanations of the risks
identified and quantitative methods used
Section 3:
Group risk capital
and prospective
solvency
assessment
Components
Section 1:
Description of
risk management
framework
• Documentation of the combining of qualitative and
quantitative elements of risk management policy
• Determination of the level of financial resources
needed to manage current business for the next
2-5 years
• Completion of an annual group risk capital
assessment, complete with a description of the
approach used to conduct the analysis
• Discussion of how risk and capital interrelate over
various time horizons and the interplay between
group risk and other capital frameworks (e.g. rating
agency and regulatory)
Risk culture and governance
Risk identification and prioritization
Risk appetite, tolerance and limits
Risk management and controls
Risk reporting and communication
The ORSA opportunity: compliance and business value
Considerations
• Identify assessment tools used to
monitor and respond to changes in
risk profile
• Explain how new risk information
is incorporated
• Risk quantification method is prescribed;
should be consistent with way in which
business in managed
• Impact of stresses on capital; consider
risk capital requirements, available
capital, regulatory, economic, rating
agency or other views of capital
• Demonstrate process for model
validation, including factors considered
and model calibration
• Capital adequacy assessment process
integrated into management and decision
making culture
• Projection of future financial position
should include economic and regulatory
capital given current risk profile,
management policy, quality and level of
capital, considering normal and stressed
scenarios
13. ORSA overview
ORSA requirements map to an ERM framework
Overall governance
arrangements
• Strategy and risk appetite
• Oversight arrangements
Decision and planning support
• Technical pricing and value contribution is core input to product design
• Metrics to identify underperforming portfolios
US ORSA Report
Section 1: Description
of the Insurer’s Risk
Management
Framework
Risk identification
• Covers all types of risks
• Identifying emerging
risks
Risk assessment and
measurement
• Single version of truth
• Reflects risks presented
US ORSA Report
Section 2:
Insurer’s Assessment
of Risk Exposures
Risk monitoring and
management
• “Industrialized”
production of risk
analysis
Risk reporting and management information
• Information to drive business decisions
• Clear, concise and reflective of current status
US ORSA Report
Section 3:
Group Risk Capital
and Prospective
Solvency Assessment
Data, IT, infrastructure
• Integration of risk and finance systems architecture
• Data to be consistent, complete, accurate and auditable
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The ORSA opportunity: compliance and business value
Reputational
Legal/
Compliance
Operational
Liquidity
Market
Credit
Insurance
Policies, standards, internal controls, people and culture
• Clear ownership of tasks and activities
• Consistent policies and standards
• Robust internal controls
14. Fact check
What section of the ORSA requirements is the most
challenging for your organization?
A.
Section 1 – ERM fundamentals
B.
Section 1 – Risk appetite
C.
Section 2 – Assessment of risk exposure
D.
Section 3 – Group risk capital
E.
Section 3 – Prospective solvency assessment
F.
Does not apply (EY, faculty, alumni, other)
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The ORSA opportunity: compliance and business value
15. Today’s agenda
►
Background and regulatory update
►
ORSA overview
► Industry
►
perspectives
Achieving long-term business value
Join today’s Twitter discussion:
Page 15
#EY_ORSA
The ORSA opportunity: compliance and business value
16. Industry perspectives
ORSA readiness
No activity –
attending
webcast
►
ORSA/ERM gaps
identified, roadmaps
developed/under
development
Active projects to
close identified
capability gaps
Participated in
second pilot –
capabilities to
produce full report
Companies are at different levels of readiness
►
►
►
ORSA working
group formed –
limited activity
In general – healthcare industry capabilities are behind life and property/casualty
Companies with favorable ERM ratings from S&P likely have many capabilities in
place
Several companies across life/health and property/casualty industries
participated in one or both pilots
►
►
First pilot allowed incomplete submissions – many submitted partial ORSA reports
Second pilot required more comprehensive ORSA report and participants indicated
comfort with their capabilities
Some companies use ORSA as the driver for ERM enhancements that drive
business value
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The ORSA opportunity: compliance and business value
17. Industry perspectives
►
Key ORSA implementation questions for the insurance industry
►
►
►
►
►
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For an insurance group with multiple insurance legal entities or with
different types of business (e.g., both Life and P/C), should they prepare a
single or multiple ORSA reports?
What will the final report look like, what information should be included
and what is an appropriate report length?
How will all the information for the report, which will likely come from
multiple business units, be pulled together effectively and efficiently?
If capital is viewed through multiple lenses/bases (e.g., RBC, economic
capital, rating agencies capital), should all of these be included in the
report?
What other stakeholders (e.g., rating agencies, external auditors) will want
to receive a copy of the report?
The ORSA opportunity: compliance and business value
18. Fact check
What measurement approach do you plan to use for
section 3 of the ORSA (the prospective solvency
assessment)?
A.
Risk based capital
B.
Rating agency capital
C.
Existing economic capital approach
D.
New economic capital approach
E.
Does not apply (EY, faculty, alumni, other)
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The ORSA opportunity: compliance and business value
19. Industry perspectives
►
Section 1 - much of the industry has put an ERM framework on paper
for the organization, but evidence of use and effectiveness remains
inconsistent
Industry perspective
►
Most companies feel comfortable
that current capabilities meet most
of the requirements of Section 1
of the ORSA Guidance Manual
►
Certain companies that have very
immature ERM programs need to
formalize their framework in place
to cover all components
►
Common capability gaps
►
Risk appetite
►
Strong risk culture
►
Evidence of risk management’s
role in key decisions
Governance structures in the
insurance industry are very
different than other financial
services companies
►
Independent CRO reporting
to CEO/Board
►
Separate risk committee of
the Board
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Implementation challenges
The ORSA opportunity: compliance and business value
►
Companies continue the
struggle to directly link risk
appetite and limits/tolerances
across key risk types
►
Definition of the risk appetite
to incorporate quantitative
measures requires the adoption
of a consistent quantitative
measure of risk
►
Consistent implementation of
ERM framework across the
group – specifically different
countries and industries
(e.g. P&C vs. Life)
20. Industry perspectives
►
Section 2 - calls for the quantitative and qualitative assessment of risk
exposures in normal and stressed conditions
Industry perspective
►
Current risk assessment is
dependent on risk taxonomy
►
►
►
In general, life companies
are less focused on
operational risk
Common capability gaps
►
Comprehensive risk inventory
with quantitative and qualitative
assessments
►
Implementation challenges
Consistent metric across
risk types
In general, P&C and Health
companies are less focused
on investment/market risk
Companies that have moved
towards an economic capital
framework have a more mature
quantitative approach in place
►
Determining how to perform the
assessment under “stressed”
conditions when the metric may
already be under a “stress” (e.g.,
economic capital may be defined
as a 1 in 200 year stress)
►
Building a more robust approach
for both qualitative and quantitative
assessment of broader range of
operational risks
The ORSA opportunity: compliance and business value
Difficult due to lack of
exposure data
►
Page 20
►
Even more quantitative
approaches require significant
approximations
21. Industry perspectives
►
Section 3 - includes two complex components
group risk capital calculation
prospective solvency assessment
►
►
Industry perspective
Common capability gaps
►
Generally viewed as most complex
component of ORSA Guidance
Manual
►
Complex groups typically don’t
have a group risk capital
calculation
►
Was not typically part of a good
ERM framework
►
Capabilities to project future
income statement and balance
sheet under stressed conditions
incorporating new business
Implementation challenges
►
Flexibility provided by the
Guidance Manual leaves many
question unanswered
Apprehension exists with regards
to the ultimate use of this section
by regulators
►
Page 21
Capabilities to project future
capital requirements – in
particular under internally
developed measurement
framework
Used to require additional
capital?
►
►
Accounting differences across
geographies and product lines
increase difficulty in relying on
existing frameworks
►
Comprehensive views of future
balance sheets under required
accounting regime (Stat, GAAP,
Economic)
►
Approaches for calculating future
required capital components for
calculation intensive balances (e.g.,
future projections of stressed
market value of liabilities)
►
Incorporation of multiple capital
frameworks to model future
distributions of excess capital
►
►
►
Reliable aggregation of financial
statements across legal entities
Used to compare
companies?
The ORSA opportunity: compliance and business value
22. Today’s agenda
►
Background and regulatory update
►
ORSA overview
►
Industry perspectives
► Achieving
long-term business value
Join today’s Twitter discussion:
Page 22
#EY_ORSA
The ORSA opportunity: compliance and business value
23. Achieving long-term business value
►
Link to ERM
►
►
►
►
Page 23
The flexibility around the ORSA report and Guidance Manual
minimize the “compliance” nature of the requirement
ORSA compliance shouldn’t be a standalone item – but rather
a way to push ERM capabilities forward
The ORSA Guidance Manual is looking to formalize and document
a robust ERM framework; the value to an organization comes from
the value of ERM
The ORSA requirement should push an organization to use and
show evidence of their ERM program working when undertaking
complex decisions
The ORSA opportunity: compliance and business value
24. Achieving long-term business value
►
Value from a strong ERM program
►
►
►
►
►
►
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Improves focus on risk and further establishes the “tone at the top”
Provides an independent challenge and review of key information,
assumptions and business practices, allowing the ability to
escalate issues
Helps to improve decision making through increased rigor and
standard / structured processes, as well as the ability to understand
financial impact based on stress events
Enhances collaboration with business units and leadership to
identify emerging risks, understand current plans to address and
focus on the future
Improved executive level discussions about risk and strategic
decision making
Enhances the external stakeholder (rating agencies, policyholders,
peer organizations) perspective of the organization resulting in
improved opportunities for growth
The ORSA opportunity: compliance and business value
26. Resources
►
►
►
►
ey.com/us/insurance
ORSA and ERM: Use
the upcoming compliance
deadline to boost existing
ERM practices
http://bit.ly/13lrRi5
ORSA readiness:
The time is now (pdf)
http://bit.ly/14gLIxg
Connect with us
►
Page 26
EY_Insurance
The ORSA opportunity: compliance and business value
27. Contact us
James Collingwood
Ernst & Young LLP
+1 312 879 6306
james.collingwood@ey.com
Chad Runchey
Ernst & Young LLP
+1 212 773 1015
chad.runchey@ey.com
Bill Spinard
Ernst & Young LLP
+1 703 747 1070
bill.spinard@ey.com
Adam Walter
Ernst & Young LLP
+1 312 879 6031
adam.walter@ey.com
Follow us on Twitter:
Page 27
@EY_Webcasts
The ORSA opportunity: compliance and business value
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The ORSA opportunity: compliance and business value
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The ORSA opportunity: compliance and business value
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The ORSA opportunity: compliance and business value
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The ORSA opportunity: compliance and business value
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The ORSA opportunity: compliance and business value
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The ORSA opportunity: compliance and business value