Some stakeholders stated that they would appreciate more detailed information on how the own risk and solvency assessment (ORSA) will impact on the solvency capital requirement.

There are concerns that supervisors might frequently set capital add-ons based on ORSA results.

In CEIOPS’ view it is important to note that the connection between the own risk and solvency assessment (ORSA) and a possible decision to set a capital add-on is not mechanistic.

The own risk and solvency assessment (ORSA) is just a source of information in the decision-making process undertaken through the Supervisory Review Process.

Supervisors will take the decision of whether to set a capital add-on on the basis of the information at their disposal, as well as on the outcome of their dialogue with the undertaking.

QUESTION: Will the own risk and solvency assessment (ORSA) be too burdensome for small undertakings?

A couple of respondents asked CEIOPS to clarify that in general the own risk and solvency assessment (ORSA) will be less complex than the SCR standard formula.

CEIOPS is aware that, in particular, the requirements of Article 44(1)(c) and (2) are a source of concern that too much complexity could be introduced into the ORSA process.

Hence it will focus on clarifying its views with regard to these requirements.

CEIOPS believes that the amount of work and complexity of the analysis for the own risk and solvency assessment (ORSA) should be proportionate to the risks faced by the undertaking.

QUESTION: What do supervisors expect from undertakings with regard to the own risk and solvency assessment (ORSA)?

Respondents further pointed out that additional guidance would be beneficial on what precisely will be expected of undertakings in the own risk and solvency assessment (ORSA), the interaction of the ORSA with internal models, what is required of the ORSA in terms of  supervisory reporting and the use supervisors will be making of the ORSA.

CEIOPS’ Issues Paper on the Supervisory Review Process and Undertakings’ Reporting Requirements published recently already elaborates on this area to a greater extent.

CEIOPS was also asked to offer more details on the application of the principle of proportionality, especially with regard to small and medium–sized undertakings.

CEIOPS will further elaborate on this issue.

QUESTION: What do supervisors expect from the group own risk and solvency assessment (ORSA)?

Some respondents underlined the uncertainty with regard to the expectations on the group own risk and solvency assessment (ORSA) as a matter that urgently required CEIOPS’ attention.

CEIOPS is aware that this issue requires further consideration as already mentioned in the Issues Paper.

QUESTION: Is too much expected with regard to the forward-looking perspective?

Another area of concern was the forward-looking perspective required for the own risk and solvency assessment (ORSA). Stakeholders agreed with this perspective but also sought reassurance that no excessive and complex modelling requirements would be imposed upon them and that demands to foresee possible future events are not unreasonable.

CEIOPS will have to develop this area of the ORSA further in its Level 3 guidance.

CEIOPS does not, however, envisage more complexity for the forward-looking assessment than for the current perspective of the ORSA, unless the undertaking intends to take on more significant or more complex risks in the future.

QUESTION: Is an independent assessment of the own risk and solvency assessment (ORSA) process and outcome really necessary?

With regard to the independent assessment of the own risk and solvency assessment (ORSA), stated as one of the ORSA principles, some respondents were opposed to external reviews.

One respondent also strongly objected to the ORSA outcome being included in the review.

CEIOPS sees an external assessment as an (equal) alternative option to an internal review and does not intend to prescribe that an external review of the ORSA is required.

CEIOPS acknowledges that the argument against the inclusion of the outcome of the ORSA in a review merits further consideration. This issue will be revisited as part of CEIOPS’ future work.

QUESTION: Will there be a lack of harmonisation on how supervisors will review the own risk and solvency assessment (ORSA) in different Member States?

One of the most important issues for respondents was that a high level of harmonisation of the own risk and solvency assessment (ORSA) review among supervisors should be achieved.

Stakeholders considered the intended absence of Level 2 implementing measures as a drawback and a threat to a level playing field, that they want to see remedied via Level 3 guidance.

CEIOPS recognises that establishing an adequate level of harmonisation for the review will be a key issue and a major challenge in its ongoing work on the ORSA.

The fact that no Level 2 implementing measures are provided for indicates that the ORSA process is not supposed to be too prescriptive and should leave sufficient room for undertakings to arrange the process as they see fit to best serve their individual needs.

This principles-based approach was welcomed by a number of respondents.

However, Level 3 guidance will have to determine what supervisors broadly should expect of undertakings’ ORSA processes.

Accordingly, the upcoming Level 3 discussions should resolve any issues that might otherwise lead to an unlevel playing field.

Way forward
CEIOPS will continue its work on Level 3 guidance and will progressively seek to develop explanations and considerations on the issues that raised concerns from the respondents.

Future Level 3 guidance will necessarily include:

- Further insights into what is expected from undertakings in the own risk and solvency assessment (ORSA) process, ORSA information to be submitted to supervisors and the interaction between the ORSA, internal models and capital add-ons.

The application of the principle of proportionality will be duly considered in this context;

- What supervisors should broadly expect of undertakings’ ORSA processes and the development of a common understanding of the general standards supervisors would want undertakings to observe;

- Issues in connection with the group own risk and solvency assessment (ORSA) in order to supply the requested clarification about supervisory expectations.

Work on Level 3 guidance on the own risk and solvency assessment (ORSA) is scheduled to start at the end of the first quarter of 2009. Stakeholders are cordially invited to contribute any further input to CEIOPS’ work.

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

The Own Risk and Solvency Assessment (ORSA) in the European Parliament legislative resolution of 22 April 2009 on the amended proposal for a directive of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (recast)