“The own risk and solvency assessment (ORSA) is a powerful tool that enables insurers to assess their own risk profile and solvency position under various scenarios, and to align their risk management and capital adequacy with their business strategy and risk appetite.
The ORSA is not a one-size-fits-all solution, but a flexible and dynamic process that reflects the insurer’s specific characteristics, risk culture, and value creation.
The ORSA is not only a regulatory requirement, but also a strategic imperative for insurers who want to survive and thrive in the competitive and uncertain market.
The ORSA aims to achieve two main goals:
(i) To enhance the enterprise risk management (ERM) capabilities of all insurers, by enabling them to identify, assess, monitor, prioritize and report on their material and relevant risks, using appropriate techniques that support risk and capital decisions.
(ii) To provide a holistic view of risk and capital at the group level, as a complement to the existing legal entity view. The ORSA should cover all material risks and entities within the scope of the group, taking into account the interdependencies and diversification effects among them. The ORSA should also consider the impact of group-specific risks, such as concentration, contagion, reputation, and strategic risks, on the solvency position of the group and its entities.
The ORSA process should be embedded in the insurer’s governance structure, with clear roles and responsibilities for the board, senior management, and relevant functions. The board should approve the ORSA policy, oversee the ORSA process, and challenge the ORSA results and actions. The senior management should implement the ORSA policy, conduct the ORSA process, and communicate the ORSA results and actions to the board and other stakeholders.
One of the key aspects of the ORSA process is the liaison with the strategy and business plan of the insurer. The ORSA should not be seen as a separate or isolated exercise, but as an integral part of the strategic planning and budgeting process. The ORSA should inform and support the strategic objectives and actions of the insurer, and the strategy and business plan should reflect and incorporate the ORSA results and actions. The ORSA should also consider the impact of the strategy and business plan on the risk profile and solvency position of the insurer, and the potential deviations or changes in the strategy and business plan due to the risk environment and business conditions. The ORSA should ensure that the insurer has a consistent and coherent vision and direction for its risk management and capital adequacy, and that the insurer is prepared and resilient for the future.
Another important aspect of the ORSA process is the consideration of environmental, social, and governance (ESG) factors that may affect the risk profile and solvency position of the insurer. ESG factors are non-financial factors that may have a material impact on the performance, reputation, and sustainability of the insurer. ESG factors include, but are not limited to, climate change, natural disasters, pollution, human rights, social justice, diversity, ethics, and corporate governance. The ORSA should assess the exposure and sensitivity of the insurer to ESG factors, and the potential opportunities and threats that may arise from them. The ORSA should also evaluate the impact of ESG factors on the strategy and business plan of the insurer, and the actions and measures that the insurer has taken or plans to take to address them. The ORSA should ensure that the insurer has a responsible and proactive approach to ESG factors, and that the insurer is aligned with the expectations and interests of its stakeholders.
By conducting an ORSA, insurers can improve their risk awareness and decision-making, as well as their communication with stakeholders, such as regulators, rating agencies, investors, and policyholders. The ORSA can also help insurers to anticipate potential capital needs and to take proactive steps to reduce solvency risks. The ORSA can be seen as the ultimate tool in the ERM of an insurer, as it integrates all aspects of risk management and capital adequacy in a forward-looking and comprehensive manner.
However, the ORSA also poses some challenges for insurers, such as:
• The ORSA requires a high level of data quality, risk modelling, and scenario analysis, which may be beyond the reach of some insurers, especially those with limited resources or complex operations.
• The ORSA involves a significant amount of judgment and assumptions, which may introduce subjectivity and uncertainty in the ORSA results and actions. Insurers should ensure that their judgment and assumptions are reasonable, consistent, and well-documented.
• The ORSA requires a regular and timely update, which may be hard for insurers to keep up with the changing risk environment and business conditions. Insurers should establish a clear and robust ORSA cycle, with triggers for ad hoc ORSAs when needed.
• The ORSA requires a clear and effective communication, which may be tricky for insurers to convey the ORSA results and actions to different audiences, with different levels of understanding and expectations. Insurers should tailor their ORSA reports and presentations to suit the needs and interests of their stakeholders.
The ORSA is not a simple or easy process, but a complex and challenging one that requires careful planning, implementation, and evaluation. It also requires constant adaptation and innovation to cope with the changing and emerging risks. Therefore, insurers need to invest in the development and improvement of their ORSA capabilities, and leverage the best practices and tools available in the industry. The ORSA is not a burden, but an opportunity for insurers to gain a competitive edge and achieve sustainable growth. The question is not whether insurers should conduct an ORSA, but how they can conduct an ORSA that is effective, efficient, and meaningful.”