The Own Risk and Solvency Assessment
(ORSA) - the new approach to the Internal Risk and Capital
Assessment (IRCA)
What is the Own Risk and Solvency
Assessment (ORSA)?
The own risk and
solvency assessment (ORSA)
must become part of the
risk management system of every insurance and
reinsurance undertaking.
This assessment requires insurance
and reinsurance undertakings to
properly determine their overall solvency needs.
The own risk and
solvency assessment (ORSA)
information is reported to solo and group supervisory
authorities
and is used in the
Supervisory
Review Process (SRP)
The
own risk and
solvency assessment (ORSA)
has a
twofold nature.
A. It is an internal assessment process
within the undertaking and is as such embedded in the
strategic decisions of the undertaking.
B. It is also a supervisory tool for the
supervisory authorities, which must be informed about the results of the own
risk and solvency assessment of the undertaking.
The
own risk and
solvency assessment (ORSA)
does NOT require an undertaking to develop or apply a full or partial internal
model. However, if the undertaking already uses an approved
full or partial internal model for the calculation of the SCR, the output of the
model should be used in the ORSA.
The
own risk and
solvency assessment (ORSA)
does NOT create a third solvency capital requirement. The ORSA should not be
overly burdensome on small or less complex undertakings.
The supervisory authority reviews the own risk and solvency assessment
as part of the supervisory review process of the undertaking.
The results of
each ORSA conducted shall be reported to the supervisory authority as part of
the information to be provided for supervisory purposes under Article 35.
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Article 44 the Framework
Solvency II Directive Proposal:
Own risk and solvency assessment
1. As part of its risk management system
every insurance or reinsurance undertaking
shall conduct its own risk and solvency
assessment.
That assessment shall include at least the following:
(a) the overall solvency needs taking
into account the specific risk profile, approved risk tolerance limits
and the business strategy of the undertaking;
(b) the compliance, on a continuous basis, with
the capital requirements, as laid down in Chapters VI, Sections
4 and 5 and with the requirements regarding technical provisions, as
laid down in Chapter VI, Section 2.
(c) the extent to which the risk profile of the undertaking concerned
deviates significantly from the assumptions underlying the
Solvency Capital Requirement as laid down
in Article 101 (3), calculated with the standard formula in accordance
with Chapter VI, Section 4, Subsection 2 or with its partial or full
internal model in accordance with Chapter VI, Section 4, Subsection 3.
2. For the purposes of point (a) of paragraph 1, the undertaking
concerned shall have in
place processes which enable it to properly identify and measure the
risks it faces in
the short and the long term and also to identify possible events or
future changes in
economic conditions that could have unfavourable effects on its
overall financial
standing.
The undertaking shall demonstrate the methods used to
determine its
overall solvency needs.
3. In the case referred to in point (c) of paragraph 1 when an
internal model is used, the
assessment shall be performed together with the recalibration that
transforms the
internal risk numbers into the Solvency Capital Requirement risk
measure and
calibration.
4. The own risk and solvency assessment
shall be an integral part of the business
strategy and shall be taken into account on an ongoing basis in the
strategic decisions
of the undertaking.
5. Insurance and reinsurance undertakings shall perform the assessment
referred to in
paragraph 1 regularly and without any delay
following any significant change in their
risk profile.
6. The insurance and reinsurance undertakings shall
inform the supervisory authorities
of the results of each own risk and solvency
assessment as part of the information
reported under Article 35.
Article 35
Information to be provided for supervisory purposes
1. Member States shall require insurance and reinsurance undertakings
to submit to the
supervisory authorities the information which is necessary for
the purposes of supervision.
That information shall include at least the information necessary for
the following when performing the process referred to in Article 36:
(a) to assess the system of governance applied by the undertakings,
the business they are carrying on, the valuation principles applied
for solvency purposes, therisks faced and the risk management systems,
and their capital structure, needs and management;
(b) to make any appropriate decisions resulting from the exercise of
their supervisory rights and duties.
2. Member States shall ensure that the supervisory authorities have
the following
powers:
(a) to determine the nature, the scope and the format of the
information referred to
in paragraph 1 which they require insurance and reinsurance
undertakings to
submit at the following points in time:
(i) at predefined periods;
(ii) upon occurrence of predefined events;
(iii) during enquiries regarding the situation of an insurance or
reinsurance
undertaking;
(b) to obtain any information regarding contracts which are held by
intermediaries or regarding contracts which are entered into with
third parties;
(c) to require information from external
experts, such as auditors and actuaries.
3. The information referred to in paragraphs 1 and 2 shall comprise
the following:
(a) qualitative or quantitative elements,
or any appropriate combination
thereof;
(b) historic, current or prospective elements,
or any appropriate combination
thereof;
(c) data from internal or external sources,
or any appropriate combination
thereof.
4. The information referred to in paragraphs 1 and 2 shall comply with
the following
principles:
(a) it must reflect the nature, scale and complexity of the business
of the
undertaking concerned;
(b) it must be accessible, complete in all material respects,
comparable and
consistent over time;
(c) it must be relevant, reliable and comprehensible.
5. Member States shall require insurance and reinsurance undertakings
to have
appropriate systems and structures in place
to fulfil the requirements laid down in
paragraphs 1 to 4 as well as a written policy, approved by the
administrative or
management body of the insurance or reinsurance undertaking, ensuring
the on-going
appropriateness of the information submitted.
6. The Commission shall adopt implementing measures specifying the
information
referred to in paragraphs 1 to 5, with a view to ensuring to the
appropriate extent
convergence of supervisory reporting.
Those measures, designed to amend non-essential elements of this
Directive, by
supplementing it, shall be adopted in accordance with the regulatory
procedure with
scrutiny referred to in Article 304 (3).
System
of Governance - Articles 41 to 49
Governance system and general requirements -
Article 41
Consistency of governance requirements across the
banking, securities
and (re)insurance
sectors is essential to ensure cross-sectoral consistency.
The
governance requirements set out
in this Directive aim at achieving this objective.
[Note: And to avoid regulatory arbitrage]
Robust governance requirements are a pre-requisite for an efficient
solvency system.
Some
risks may only be addressed through governance requirements rather
than by setting
quantitative requirements.
A robust governance system is hence of key
importance for the
adequate management of the insurer and critical to the effectiveness
of the supervisory
system.
The governance system includes compliance with
the requirements on fit and proper, risk
management, the
own risk and solvency assessment,
internal control, internal audit, the
actuarial function and outsourcing.
The implementing measures on the governance requirements will specify
the proportionality principle.
The identification of
governance functions in the Directive should
help undertakings in
deciding how to implement the governance system. A function is an
administrative capacity
to undertake particular tasks.
The identification of a particular function does not prevent the
undertaking from freely deciding how to organise this function in
practice unless this is otherwise specified in this Directive.
This should not lead to unduly burdensome requirements because account
should be taken of the nature, scale and complexity of the operations
of the undertaking.
The governance functions can therefore be
staffed
by own staff or can rely on advice from outside experts or can be
outsourced to experts within the limits set by this Directive.
Furthermore, in smaller and less complex undertakings, more than one
function can be carried out by one person or organisational unit.
In order to make the governance system work well, undertakings are
required to have written
policies in place which clearly set out how they deal with internal
control, internal audit, risk
management and, where relevant, with outsourcing.
It is essential that the administrative or
management body is actively involved in the governance system.
The written policies should therefore be approved by the
administrative or management body and be revised at least annually or
before any significant change is implemented in the system.
The amendment of the policies prior to the system change is essential
because the undertaking would otherwise already be in non-compliance
with its internal strategies and processes. It
is the role of the supervisory authority in the SRP to review and
evaluate the governance system.
Article 250
Supervision of the system of governance
Member States shall require the participating insurance or reinsurance
undertaking or
the insurance holding company to
undertake *at the level of the group* the
assessment
required by Article 44.
The
own risk and solvency assessment
conducted
at group level
shall be subject to supervisory review by the
group supervisor
in accordance with Chapter III.
Where the participating insurance or reinsurance undertaking or the
insurance holding company so decides, and subject to the agreement of
the group supervisor, it may undertake any assessments required by
Article 44 at the level of the group and
at the level of any subsidiary in the group at
the same time, and may produce a single document covering all
the assessments.
Where the group exercises the option
provided in the second subparagraph, it shall submit the document to
all supervisory authorities concerned at the
same time.
Exercising this option shall not remove
from the subsidiaries concerned the obligation to ensure that the
requirements of Article 44 are met.
You may
visit the next pages
Own_Risk_and_Solvency_Assessment_1.html
Own_Risk_and_Solvency_Assessment_2.html
Own_Risk_and_Solvency_Assessment_3.html
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