annual educational conference & … session...iasa 86th annual educational conference &...

IASA 86TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW

How is your ORSA coming along?

Session Number 104

June 9, 2014

1:30 – 3:00 p.m.


Mary Peter, Director of ERM, Eide Bailly LLP

Scott Anderson, FCAS, MAAA, FCA

SVP & Actuary, Gross Consulting

ORSA Update Presented by:

http://www.cgconsult.com/index.htm

Disclaimer

These seminar materials are intended to provide the seminar participants

with guidance in enterprise risk management (ERM) and Our Risk

Solvency Assessment (ORSA) matters. The materials do not constitute,

and should not be treated as professional advice regarding the use of any

particular ERM technique or ERM consequences associated with any

technique.

Every effort has been made to assure the accuracy of these materials.

Eide Bailly LLP and the author do not assume responsibility for any

individual's reliance upon the written or oral information provided during

the seminar. Seminar participants should independently verify all

statements made before applying them to a particular fact situation, and

should independently determine the ORSA, ERM or risk management

approach of any particular risk, risk management, ORSA or ERM

planning technique before using or recommending the technique to a

client or implementing it on the client's behalf.

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Learning Objectives

An understanding of NAIC's Own Risk and Solvency

Assessment (ORSA) Model Act #505 requirements for

2015

An understanding of the 2013 ORSA Pilot Program

An understanding of how the ORSA requirements may

impact a change in your company's ERM program.

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Why ORSA? Own Risk and Solvency Assessment

Proposed in U.S. due to Solvency II which was adopted by the European Commission

Part of NAIC’s Solvency Modernization Initiative

Two main goals of ORSA according to the NAIC: “To foster an effective level of ERM at all insurers, through which each

insurer identifies, assesses, monitors, prioritizes and reports on its material and relevant risks, identified by the insurer, 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; and

“To provide group-level perspective on risk and capital, as a supplement to the existing legal entity view”

Source: NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual - 2013

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What is ORSA? Own Risk and Solvency Assessment?

The ORSA is:

A component of an insurer’s ERM framework

A confidential internal assessment

Appropriate to nature, scale, and complexity

Conducted by the insurer

Material and relevant risks to current business plan

Conducted annually

Internal documentation of process and results

Confidential, high level report to be submitted to lead state commissioner

Source: NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual - 2013

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NAIC Timeline of ORSA

NAIC formally adopted the ORSA Guidance Manual in

November, 2011; most recent manual is as of March, 2013

The requirements outline in the Manual are based upon the

NAIC Risk-Management and Own Risk and Solvency

Assessment Model Act #505.

Insurers should refer to the laws adopted by the insurer’s

state of domicile when determining its requirements for risk

management and own risk solvency assessment.

NAIC conducted an ORSA Feedback Pilot Project during

2013.

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The depth and detail of information is to be influenced

by the nature and complexity of the insurer

Can reference other documents to be made available

to the regulator upon examination or upon request

Signature of insurer’s chief risk officer or other

executive with responsibility for oversight of ERM;

attesting the information in the ORSA summary report

has been provided to insurer’s board of directors or

appropriate committee

NAIC ORSA Guidance Manual – Updates as of March 2013

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Insurers Exempt from ORSA

If enacted, all insurers are to comply with ORSA,

except:

Individual insurer’s annual direct written and unaffiliated

assumed premium is less than $500 million

Insurance group (all insurance legal entities within the group)

annual direct written and unaffiliated assumed premium is less

than $1 billion

• Both exclusions above include international direct and assumed premium

but exclude premiums reinsured with the Federal Crop Insurance

Corporation and Federal Flood Program

• Commissioners may require otherwise exempt insurers to meet ORSA

requirement if unique circumstances are present

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How ORSA Relates to ERM

ORSA Section 1: Should include a high level summary

of the ERM Framework principles

•According to the NAIC, an ERM Framework should, at the

minimum, include five key principles, including:

Risk Culture and Governance

Risk Identification and Prioritization

Risk Appetite, Tolerances and Limits

Risk Management and Controls

Risk Reporting and Communication

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Section 2: Risk Assessments in stressed and normal

environments

Document risk exposure in both normal and stressed

environments

Document outcomes of any plausible adverse

scenarios run

Consider impact of stresses on capital

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Section 3: Group Risk Capital (GRC) and Prospective

Solvency Assessment

Document how the company combines the qualitative elements

of it’s risk management policy and the quantitative measures of

risk exposures to determine the level of financial resources it

needs to manage its current business over the next 2- 5 years

Purpose- to assist regulators in forming subjective

assessments of the quality of insurer’s risk and capital

management

Examples of GRC: VAR, TVAR, Probability of Ruin

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2013 Pilot Program Observations

ORSA Summary Report Foundation should be:

• Developed from reporting of ERM to the Insurer/Group’s Board of

Directors

• Contain the basic, same elements of this report

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Provide Table of Contents

Include an Executive Summary

Mapping of legal entities to business units described in the

report

Provide list of risk owners

Include Heat Maps

Glossary of terms and acronyms

Reference to other ORSA documents; need to be available

to the regulator upon request

• Appendix of reports and tools with description

2013 ORSA Pilot Observations (cont.)

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Comparative view of multi-years financial data

Tables and graphs need to include key/legend and

explanatory text

Use most current data

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Detail of actual risk limits to support the assertion that

Insurer has risk limits

If risk limits have changed, discuss the change

Discuss risks prospectively

Discuss risk mitigation

Provide flowchart of Risk Management & Controls

Explain how compensation & incentives are tied to risk

management


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Include a discussion of information technology risk

Risk ranking/rating can be provided in varying formats

Discuss emerging risks in the prospective risk section of

ORSA

Identify risks associated with intercompany dependencies

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Perform combined stress scenarios in addition to single

stress scenarios

Create a graphical illustration to compare different model

results (if applicable)

More stress testing on liquidity, especially for life insurance


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Provide overview and detailed explanation of capital

models

If the Insurer is international, provide overall group capital in

Section 3

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In preparation for the actual ORSA filing:

• Attestation Placeholder and signature, including contact information

• Expected Filing Date; reach an understanding with your lead state

regulator

• Walk Through Discussion with Regulator; plan a

meeting/webinar/conference call with your lead state regulator to

describe and walk through the ORSA Summary Report and answer

questions from the regulator

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2014 Pilot Project

The Own Risk and Solvency Assessment (ORSA) (E)

Subgroup will:

Conduct an ORSA Feedback Pilot Project in 2014 with

undisclosed insurers/groups which voluntarily submit an

ORSA Summary Report for regulatory review. The purpose

of the project is to continue to increase regulators’

knowledge and understanding of the ORSA Summary

Reports, to continue to enhance regulatory guidance on the

same and to continue to provide high level (non-company-

specific) feedback to the industry prior to the actual filing of

ORSA Summary Reports.—Essential

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2014 Pilot Project (cont.)

Begin the development of regulator guidance for states’ use

of the ORSA Summary Report in financial analysis and

examination.—Essential

Begin to develop an enterprise risk management (ERM)

education program for regulators that is designed to

maximize the benefit of such training for the ORSA 2015

effective date.—Important

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This will be the third ORSA Feedback Pilot Project

Undisclosed insurance groups/insurers

Further identify any sections in the current NAIC ORSA

Guidance Manual that might need clarification and/or

amendment

Further develop analysis and examination guidance for

regulators

Assist other relevant NAIC committee addressing ERM or

ORSA initiatives

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Only Lead States, Domestic State, Subgroup Members and

NAIC staff will have access to these pilot project ORSA

reports

The names of the volunteer insurers will be held

confidential

A high-level non-insurer specific feedback will be provided

to interested parties and relevant NAIC committees

All ORSA Summary Reports provided by volunteer insurers

will be destroyed either three days after the Financial

Condition € Committee received its high-level summary

report from the subgroup and/or soon after year-end 2014,

whichever is later

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How to do this Assessment

Review analysis processes

Review documentation

Review how you use the information in your ERM cycle

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Insurance Risk

Model the combined volatility of all of the policies

Part of the ERM cycle

This is the goal of ORSA

Can’t dictate a specific model

Summary document and explanation

How it fits into your ERM cycle

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Process and Data Crunching

Review of the Financial Planning process

Review the capital adequacy measurement process

How does the measurement of risk impact the

ratemaking processes

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What is the Actual Report?

ORSA Summary Report isn’t the Assessment

Anything referenced should be available upon request

Samples can be provided

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How ORSA Relates ERM

ERM is the foundation for the Company’s ORSA

Section 1 of ORSA ties to ERM

Section 2 and 3 have some similar ERM concepts

• Additional actuarial analysis

ORSA links the risk identification process with capital

management and strategic planning in Section 2 and 3

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ERM/ORSA – Actuarial Perspective

It’s tailored to your own company so there is no one

size fits all process

Typical business risks

ERM at an insurer - we are in the business of risk

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How Does ORSA impact your ERM?

Formalization of the ERM Process

Disclosure with your regulator

Consequences of identifying gaps

Challenges the value of ERM?

Connects ERM to capital modeling, financial and strategic

planning

More time with the Board

Attestation and signature

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Questions

Mary Peter

Director of Enterprise Risk Management

[email protected]

612-253-6662

866-585-9059

Scott Anderson FCAS, MAAA, FCA

SVP & Actuary

[email protected]

651-224-0041

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