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Solvency Assessment and Management:

Steering Committee

Position Paper 1071 (v 6)

Own Risk and Solvency Assessment – Further Guidance

1. INTRODUCTION AND PURPOSE

The latest version of Position Paper 34 (v6.2) on the Own Risk and Solvency Assessment (ORSA) was drafted before the EIOPA Level 3 guidance on the ORSA had been released. The purpose of this document is to provide further guidance (non-binding guidance principles) on the ORSA in the SAM regime based on the additional clarity provided by EIOPA’s Final Report on Public Consultation No. 11/008 on the Proposal for Guidelines on Own Risk and Solvency Assessment (dated 9 July 2012). The recommendations in this document should be read in conjunction with Position Paper 34. Although the EIOPA guidance has been through a public consultation phase, it may still be subject to amendments to reflect future developments. As such, the comments contained in this document may also be subject to change.

It should be noted that the recommendations in this document serve as guidance to assist insurers on how to interpret and apply the ORSA requirements of the primary and secondary legislation. The guidance does not form part of the binding requirements as set out in primary and secondary legislation. As such insurers (groups) would need to demonstrate how the principles set out in the primary and secondary legislation are complied with.

2. DIFFERENCES FROM EIOPA GUIDANCE

The EIOPA consultation paper does not contradict any recommendations made in Position Paper 34.

One area of difference is that Position Paper 34 recommends an independent review of the ORSA whereas EIOPA does not explicitly do so. The ORSA working group is currently of the opinion that the independent review should be retained as it provides assurance, in particular, to the Board and senior management that the ORSA process is working appropriately. This difference is not expected to impact on third country equivalence.

3. RECOMMENDATIONS FOR SAM ADOPTION

This section contains extracts from the EIOPA Level 3 guidance, amended as deemed appropriate by the ORSA working group, to be considered for incorporation in the SAM Level 3

1 Position Paper 107 (v 6) was approved as a FINAL Position Paper by Steering Committee on

23 June 2014.

Solvency Assessment and Management: Steering Committee Position Paper 107 (v 6) – Own Risk and Solvency Assessment - Further Guidance

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guidance. This section works through each guideline proposed by EIOPA. The guidelines are written in bold, with explanatory text following in normal font.

Introduction

1.1. According to Position Paper 34 under the proposed legislation under SAM on the taking-up and pursuit of the business of Insurance and Reinsurance, hereinafter referred to as the “Legislation” or as “SAM”, and aware of the uncertainty as to the demands of the ORSA, the proposed guidelines seek to provide additional details on how the ORSA is to be interpreted.

1.2. These guidelines should be read in conjunction with the qualitative requirements on the governance and risk management framework as established through the SAM structures.

1.3. The guidelines focus on what is to be achieved by the ORSA rather than on how it is to be performed. With the overall solvency needs assessment representing the insurer’s (group’s) own view of its risk profile and capital needs and other means needed to appropriately address these risks, the insurer (group) should decide for itself how to perform this assessment appropriately given the nature, scale and complexity of its risks.

1.4. The guidelines suggest some documentation to evidence the ORSA. These suggested documentation requirements are generic and do not recognise how insurers (groups) run their business. It is recommended that insurers and groups adopt the suggested documentation requirements, but it is also recognised that insurers (groups) would need to evidence the ORSA in line with how their businesses are managed. Thus in practice there may be additional records evidencing the ORSA that have not been addressed by this paper.

1.5. The guidelines apply to both solo insurers and to group level insurers. Additionally, the guidelines - in a separate section - address issues relevant to the group specificities of the ORSA, in particular on account of specific risks to the group or risks that could be less relevant at solo level than at group level.

1.6. The guidelines apply similarly to standard formula and partial and full internal model users with some additional explanations dedicated specifically to the latter.

1.7. The guidelines cover general issues such as the principle of proportionality, the role of the Board and senior management and documentation of the ORSA, as well as specific issues, for example, the assessment of the overall solvency needs, the continuous compliance with the requirements on regulatory capital and technical provisions and the deviations from assumptions underlying the Solvency Capital Requirement (SCR) calculation.

1.8. It is crucial that the Board and senior management are aware of all risks the insurer (group) faces,

regardless of whether the risks are included in the SCR calculation or whether they are easily quantifiable or not and that the Board and senior management also take an active role in the ORSA, directing and challenging its performance.

1.9. The assessment of the overall solvency needs does not necessarily call for a complex approach

but it has to be sufficiently comprehensive to effectively reflect the undertaking-specific risk profile.

1.10. The timing of the ORSA should be appropriate so as to demonstrate that it is embedded in the business and is used in strategic decisions.


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1.11. Internal model users should use the model in the performance of the ORSA to question its continued adequacy of the model for reflecting the risk profile of the insurer (group).

1.12. The relevant guidelines for solo insurers apply mutatis mutandis to the Group ORSA. Additionally, groups need to take into consideration the group specific guidelines.

1.13. It is important to note that the ORSA includes both a quantitative and qualitative assessment of risk and capital of an insurer (group). As such the quantitative assessment should cover both regulatory and economic solvency. (Please refer to Annexure 1 – Explanatory Notes)

Section I: General considerations

1.14. The ORSA is defined as the entirety of the processes and procedures employed to identify, assess, monitor, manage, and report the short and long term risks an insurance undertaking (and insurance group) faces or may face and to determine the own funds necessary to ensure that insurers (and groups) overall solvency needs are met at all times and are sufficient to achieve its business strategy.

1.15. Insurers (groups) are envisioned to be required by legislation to perform a regular ORSA2 as part

of the risk management system. The main purpose of the ORSA is to ensure that the insurer (group) engages in the process of assessing all the risks inherent in its business and determines its corresponding capital needs. To achieve this, an insurer (group) must have adequate, robust processes for assessing, monitoring and measuring its risks and overall solvency needs, while ensuring that the output from the assessment is embedded into the decision-making processes of the insurer (group). Conducting an assessment of the overall solvency needs requires properly involved input from across the whole insurer (group). The ORSA is not complied with by just producing a report or by completing templates.

1.16. The assessment of “overall solvency needs” reflects the way the insurer (group) proposes to

manage risks it faces through capital needs or other mitigation techniques. This takes into consideration its risk profile, approved risk tolerance limits and business strategy. Determining overall solvency needs is expected to contribute to assessing whether to retain or transfer risks, how best to optimise the insurer’s (group’s) capital management, how to establish the appropriate premium levels as well as providing input to other strategic decisions.

1.17. A balance sheet projection is one component of the ORSA. It is useful for the calculation of forward-looking capital requirements and in the assessment of overall solvency needs. It aids with strategic planning and decision-making. A balance sheet projection on its own however is insufficient for an insurer (group) to identify, assess, monitor, manage and report its risks and thus the ORSA should encompass other (risk and capital management) processes the insurer (group) has in place.

1.18. The ORSA will also allow the insurer (group) to determine the adequacy of its regulatory capital

position. This requires the insurer (group) to ensure that it can meet the regulatory capital requirements in the form of the minimum capital requirement (MCR) and the solvency capital

2 It is acknowledged that the ORSA entails many processes and procedures embedded in the

day-to-day management of risk and the business, and the intention of the guidance is not to be overly prescriptive as to how exactly these processes are designed or executed. Where reference is made in the guidance to “running” or “conducting” the ORSA process, it implies collating the risk-related information from these business-as-usual processes, updating the financial projections where required, and producing risk and capital related management information. In addition information collated from these processes will also assist in the preparation of the partial or full ORSA supervisory report at specific points in time.


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requirement (SCR) at all times and in the ORSA the insurer (group) has to assess whether it will succeed in this endeavour. It is also expected to consider whether the SCR, calculated with the standard formula or an internal model, is appropriate given the insurer (group)’s risk profile.

1.19. An insurer (group) cannot simply rely on the regulatory capital requirements to be adequate for its

business and risk profile. An essential part of risk management involves the insurer (group) performing its own assessment of the own funds (including amount, quality, etc.) it needs to hold in view of its particular risk exposure and business objectives. Since the risks the insurer (group) is exposed to translate into solvency needs, looking at risk and capital management separately is not appropriate.

1.20. As the overall solvency needs assessment is an insurer’s (group) own analysis, insurers (groups)

have flexibility in this assessment. However, supervisory expectations are more specific with regard to the continuous compliance with the regulatory capital and technical provisions and the assessment of any deviation between the insurer’s (group’s) risk profile and the assumptions underlying the SCR calculation.

1.21. The ORSA may call for the performance of tasks that the insurer (group) has already performed in another context in which case no duplication of tasks is required but the result reached is taken into account in the ORSA.

Guideline 1- Principle of proportionality The insurer (group) should develop its own processes for the ORSA, tailored to fit into its organisational structure and risk management system with appropriate and adequate techniques to assess its overall solvency needs, taking into consideration the nature, scale and complexity of the risks inherent to the business.

1.22. An insurer (group)’s assessment of its overall solvency needs does not necessarily call for the use of a complex approach. The methods employed may range from (simple) stress tests to more or less sophisticated economic capital models. Where such economic capital models are being used, these do not need to meet the requirements of internal models for the calculation of the SCR in accordance with [Internal Model Approval Process (IMAP)].

1.23. The proportionality principle is to be reflected not only in the level of complexity of the methods

used but also in the frequency of the ORSA to be established by the insurer (group) and in the level of granularity of the different analyses to be included in the ORSA. Any specific guidance on proportionality issued by the SAM structures should also be considered for the ORSA.

Guideline 2- Role of the Board and senior management

The insurer (group) should ensure that its Board and senior management take an active part in the ORSA including providing steering on how the assessment is to be performed and challenging its results.

1.24. The Board and senior management should approve the ORSA policy and ensure that the ORSA is appropriately designed and implemented.

1.25. The ORSA is a very important tool for the Board and senior management of the insurer (group)

providing it with a comprehensive picture of the risks to which the insurer (group) is exposed or could face in the future. It has to enable the Board and senior management to understand these risks and how they translate into capital needs or alternatively require mitigation actions.


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1.26. The Board and senior management should challenge the identification and assessment of risks, and any factors to be taken into account. They should also give instructions on management actions to be taken if certain risks were to materialise.

1.27. As part of the ORSA process, the Board and senior management are also expected to challenge

the assumptions behind the calculation of the SCR to ensure they are appropriate in view of the assessment of the insurer (group)'s risks.

1.28. It is also the Board and senior management’s responsibility, taking into account the insights

gained from the ORSA process, to approve the long and short term capital planning, whilst considering the business and risk strategies it has decided upon for the insurer (group). This plan includes alternative strategies to ensure that solvency needs can be met even under unexpectedly adverse circumstances.

Guideline 3 – Documentation

The insurer (group) should have in place at least the following documentation on the ORSA:

a) ORSA policy;

b) Record of each ORSA;

c) Internal management information on risk and capital management (Internal report on ORSA); and

d) ORSA supervisory report.

1.29. Although the ORSA is an ongoing process, a report is required at least annually for the supervisor

and it is essential that it is useful for the insurer (group), particularly the Board, as they will sign it off.

1.30. Documenting information does not necessarily require that new reports or documents are drafted; it can be sufficient to refer to existing documents where these contain the relevant information and just record additional information if and insofar as this is necessary to present the full picture.

1.31. The ORSA and documentation around the ORSA should be performed in such a way that it can

be reviewed with reasonable effort by a third party. Thus the documentation should be complete, accurate and present clear audit trails. Documentation should not be overly and unnecessarily complex.

Section II: ORSA policy

Guideline 4 – ORSA policy

The ORSA policy should include at least:

a) A description of the processes and procedures in place to conduct the ORSA including how the forward-looking perspective is addressed;


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b) Consideration of the link between the risk profile, the approved risk tolerance limits and the overall solvency needs;

c) Information on: (i) How stress tests / sensitivity analyses or reverse stress testing are to

be performed and how often they are to be performed; (ii) Data quality requirements; (iii) The frequency and timing for the performance of the (regular) ORSA

and the circumstances which would trigger the need for an ORSA outside the regular timescales; and

(iv) The areas of the ORSA which are subject to independent review and the frequency with which these will be reviewed.

1.32. Insurers (groups) are envisioned to be required by legislation to have a written policy on risk management. As risk management includes the ORSA, insurers (groups) have to develop an ORSA policy as part of the risk management policy. This ORSA policy may consist of a suite of other policies which discuss the components underlying the ORSA.

1.33. The independent assessment should include an assessment of the process whereby the ORSA has been performed and whether the ORSA policy has been complied with. It is not intended that the independent assessment of the ORSA should duplicate areas subject to independent assurance in the statutory regulatory reports and annual financial statements.

Section III: Record of each ORSA process

Guideline 5 – General guideline

The ORSA and its outcome should be appropriately evidenced and internally documented.

1.34. The insurer (group) records the performance of each ORSA and the assessment of any deviations in its risk profile from the assumptions underlying the SCR calculation to a level of detail that enables a third party to evaluate the assessments. The record of each ORSA includes: a) A description of the risk categories which have been identified;

b) The methods used in identifying and analysing risks, including a description and explanation

of risks;

c) The links between the risk assessment and the capital allocation process and an explanation of how the approved risk tolerance limits were taken into account;

d) An explanation of how risks not covered with own funds or not quantified are managed;

e) A description of the methodology used for the quantification of overall solvency needs;

f) An amount/range of values of the overall solvency needs over a one-year-period, as well as at the end of the business planning period and a description of how the insurer (group) expects to cover the needs along these years in order to ensure that policyholder liabilities


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are continuously met. In calculating and meeting economic capital requirements, policyholder interests should not be put at risk;

g) Details on the conclusions and the rationale for them from the assessment of the continuous compliance with the requirements of regulatory capital and technical provisions;

h) The identification and explanation of the differences identified from the comparison of the insurer (group)’s risk profile with the assumptions underlying the calculation of the SCR. In case the deviations are considered to be significant in either direction, the internal documentation addresses how the insurer (group) has reacted or will react;

i) There should be a feedback loop between the outcome of the ORSA and the business plans. Thus the documentation should include action plans arising from the assessment and the rationales for them. This requires the documentation to cover any strategies for raising additional own funds where necessary and the proposed timing for actions to improve the insurer (group)’s financial condition;

j) A description of what internal and external factors were taken into consideration in the forward-looking perspective;

k) Details of any planned relevant management actions, including an explanation and a justification for these actions, and their impact on the assessment;

l) A record of the challenge process performed by the Board and senior management; and m) The findings of the independent review of the ORSA, together with the Board and Senior

Management’s responses to these findings.

Section IV: Internal ORSA Management Information

Guideline 6 – Internal ORSA Management Information (Internal report on ORSA)

Once the process and the result of the ORSA has been approved by the Board and senior management, at least information on the results and conclusions regarding the ORSA should be communicated to all staff for whom the information is relevant.

1.35. Management information on risk and capital management should form part of the regular Management Information framework of an insurer (group) and be provided to senior management and the Board on a regular basis.

1.36. The information communicated to the Board and senior management has to be sufficiently detailed to ensure that they are able to use it in its strategic decision-making process and other staff can ensure that any necessary follow-up action will be taken.

1.37. The output of the ORSA should evidence the risk and capital management processes and procedures and express a view of the current and future capital positions of the insurer (group).

1.38. The internal management information reports on risk and capital management (internal report on

the ORSA) developed by the insurer (group) could be the basis of the ORSA supervisory report. If the insurer (group) considers that the internal reports have appropriate levels of detail also for supervisory purposes then the same reports may be submitted to the supervisor.


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Section V: Specific features regarding the assessment of overall solvency needs and the balance sheet projection

Guideline 7 – Valuation

Where an insurer (group) uses a valuation basis different from the SAM basis for

assessment of its overall solvency needs, it has to explain how the chosen basis ensures

better consideration of its risk profile, approved risk appetite (and related tolerances) and

business strategy of the insurer.

The chosen basis should comply at all times with the overarching governance principle

of sound and prudent management of the business.

The chosen basis should be used consistently throughout the insurer (group)’s own

assessment of overall solvency needs.

The insurer (group) should provide an assessment of the material differences between

its chosen basis and the SAM valuation basis.

1.39. The assessment of differences between the chosen basis and the SAM basis should include all material elements of the balance sheet. The diversification effects between risks should also be considered. In this the insurer (group) is not bound by the correlations incorporated in the standard formula, but may use those most suitable to the business.

1.40. The process of assessing overall solvency needs should enable the insurer (group) to properly identify and manage significant risks it faces or could face in the short and longer term and project its capital over the business planning period. Projections and scenario analysis should be made to consider likely changes to the risk profile and business strategy over the business planning period. Sensitivities of assumptions used should also be tested.

1.41. While there may be insurers or insurance groups using the SCR standard formula for ORSA purposes, due to the size and complexity of the organisations, it may not be the case for all insurers and groups that their risk profiles are reflected appropriately within the standard formula. More complex insurers and groups should consider using an internal model for ORSA purposes. The models used for calculating economic capital for ORSA purposes should appropriately reflect and quantify all the material risks identified by the insurer’s ERM framework, their impact on the insurer and potential mitigating actions

1.42. Although the model used for calculating economic capital is not expected to meet regulatory approval, the insurer should ensure that the model is subject to independent review. The independent review can either be internal, where an insurer has the appropriate independent skills and expertise in-house (e.g. Internal Audit), or external. Elements of the model (such as completeness and accuracy of data, appropriateness of assumptions etc.) should be reviewed regularly. Where modelling and analysis techniques remain consistent from one year to the next, these elements need to be reviewed less frequently. The requirements for providing assurance will be driven by the Reporting Task Group and this guidance will be aligned with them.

Guideline 8 – Assessment of overall solvency needs


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The insurer (group) should express its overall solvency needs in quantitative terms and

complement the quantification by a qualitative description of risks.

1.43. Given the principle of proportionality (and within materiality) the ORSA should ensure a comprehensive assessment of the insurer (group)’s solvency needs in view of its business strategy, risk profile and approved risk appetite (and related limits and tolerances) it sets for itself and to meet its responsibility towards policyholders.

1.44. It may not be appropriate to cover all risks by capital. If risks are to be quantified and covered by capital, insurers (groups) should estimate the level of materiality and for material risks determine the capital required and explain how these risks will be managed.

1.45. In the assessment of overall solvency needs an insurer (group) needs to consider all risks (both those that are quantified and covered by capital and those that are not covered by capital, but managed through mitigating techniques). The insurer (group) should include a rationale for its risk assessment, i.e. explain why certain risks are covered by capital and others not. An insurer (group) may decide not to use capital as a buffer for all its quantifiable risks but to manage and mitigate those risks instead. However it still has to assess all material risks.

1.46. For risks not quantified, but managed through mitigation techniques, the insurer (group) should explain these risks and how they will be managed.

1.47. Where an insurer belongs to a group the solo ORSA (or the portion of the group ORSA dealing with solo results) should consider group risks materially impacting the solo entity.

1.48. The ORSA should consider the effectiveness of risk transfer where risk mitigating techniques and reinsurance arrangements are in place. Where there is no effective risk transfer this has to be taken into account in the assessment of the overall solvency needs.

1.49. The assessment needs to cover whether the insurer (group) has sufficient financial resources or realistic plans to raise additional capital, if and when required. The assessment of financial resources should consider the business plans and be forward looking over the business planning period. In assessing the sufficiency of financial resources it has to take into account the quality and volatility of own funds and their loss absorbency capacity under various scenarios.

1.50. Conducting an assessment of the overall solvency needs involves input from across the whole undertaking. One difference to the SCR calculation is that for the overall solvency needs assessment the insurer (group) considers all material risks, including long term risks it could face within the timeframe determined by its business planning period. Although the SCR only takes quantifiable risks into account, the insurer (group) is expected to identify and assess the extent to which non-quantifiable risks are part of its risk profile and to ensure that they are properly managed.

1.51. Not only should the quantitative assessment cover the insurer (group)’s own (economic) bases, but should also include an assessment of the regulatory capital and own funds over the business planning period. The purpose of this is to assess continuous compliance. The assessment of solvency should cover at least the SCR, MCR and Own Funds over the business planning period.

1.52. The assessment of overall solvency needs should take into account at least the following: a) Consider all material risks arising from all assets and liabilities, including intra-group

arrangements and off-balance sheet items b) Consider the risk appetite framework of the insurer (group)


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c) Reflect the insurer (group)’s management practices, systems and controls including the use of risk-mitigating techniques

d) Assess the quality of processes and inputs in particular the adequacy of the undertaking’s system of governance, taking into consideration risks that may arise from inadequacies or deficiencies

e) Connect business planning to solvency needs f) Include explicit identification and consideration of possible future scenarios g) Address potential external stresses

1.53. The assessment of overall solvency needs should take into account management actions that may be adopted in adverse scenarios. The overall solvency assessment should assess the implications of implementing management actions, their financial effects and take into account any preconditions that may affect the implementation of management actions as risk mitigators. The assessment should also address how management actions would be enacted in times of financial stress.

1.54. Where the insurer (group) uses the standard formula as a baseline for its assessment of its

overall solvency needs, it is expected to demonstrate that this is appropriate to the risks inherent in its business and reflects its risk profile.

1.55. If undertaking-specific parameters are approved to be employed in the SCR calculations, as

submitted by the insurer (group), these have to be the same as those used in the overall solvency needs assessment.

Guideline 9 – Forward looking perspective

The assessment of overall solvency needs should be forward looking.

1.56. The assessment should be performed over the business planning period of the insurer (group). Thus this guidance will not be prescriptive as to the number of years to be covered by the projections. The insurer (group) needs to project its capital needs over its business planning period. This projection is to be made considering likely changes to the risk profile and business strategy over the projection periods and sensitivity of assumptions used. Any regularly developed business plans or changes to existing business plans need to be reflected in the ORSA, taking into account the new risk profile, business volumes and mix as expected during the projection periods.

1.57. The analysis of the insurer's (group’s) ability to remain a going concern and the financial

resources needed to do so over a possibly longer time horizon than taken into account in the calculation of the SCR is an important part of the ORSA.

1.58. Unless the insurer (group) is in a wind-up scenario, it should consider how it can ensure that it remains a going concern. Thus an assessment of risks faced currently and over the longer term should be performed. In order to do this successfully, it does not only have to assess its current risks but also the risks it will or could face in the longer term. That may mean that, depending on the complexity of the insurer’s (group’s) business, longer term projections of the business which are a key part of any insurer’s (group’s) financial planning, including business plans, and projections of the economic balance sheet and variation analysis to explain them may be appropriate. These projections, if appropriate, are required to feed into the ORSA in order to enable the insurer (group) to form an opinion on its overall solvency needs and own funds.

1.59. In order to provide a proper basis for decision making and identify material risks and consequences for solvency inherent to the business plan, a range of possible scenarios for the


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plan have to be tested. This may include (but are not limited) to economic volatility, demographic changes, new business volumes, changes in expense profiles, inflation, etc. The insurer (group) should thus take into account external factors that could have an adverse impact on its solvency and financial position (own funds). The capital management plans and capital projections require the insurer (group) to consider how it might respond to unexpected changes in external factors.

1.60. Capital planning includes projections of capital requirements and own funds over the planning period (and may include the need to raise new own funds). It is up to each insurer (group) to decide on its own reasonable methods, assumptions, parameters, dependencies or levels of confidence to be used in the projections.

1.61. As part of the business and capital planning processes, an insurer (group) is required to regularly

carry out stress tests, reverse stress-tests, as well as scenario analyses to feed into its ORSA. The stress testing scope and frequency needs to be compatible with the principle of proportionality, having regard to the nature, scale and complexity of the insurer’s (group’s) business and risk profile. Further guidance on stress testing will be developed through the SAM structures.

Guideline 10 – Regulatory capital requirements

As part of the ORSA the insurer (group) should ensure that the assessment of

compliance on a continuous basis with the regulatory capital requirements

includes, at least, an assessment of:

a) potential future changes in the risk profile in stressed situations; b) the quantity and quality of its own funds over the whole of its business

planning period; and c) the composition of own funds across tiers and how this composition may

change as a result of redemption, repayment and maturity dates during the business planning period.

1.62. For the assessment of the compliance on a continuous basis with the regulatory capital and technical provisions requirements within the ORSA, the valuation basis should be in line with the SAM principles.

1.63. Continuous compliance of the SCR, MCR and Own Funds requires both calculation capabilities and review procedures and processes to be in place. The ORSA should assess both these areas.

1.64. Continuous compliance does not imply the obligation on insurers (groups) to recalculate the full

regulatory capital requirement and own funds all of the time. It may be appropriate for an insurer (group) to perform an estimate of SCR, MCR and Own Funds since the last full calculation. Estimations should be proportionate to the nature, scale and complexity of the risks inherent in the business.

1.65. To enable it to estimate with sufficient accuracy changes in its capital requirements and eligible own funds’ since the last full solvency calculation it may be appropriate for a calculation of some aspects and an estimation of others. The choice between a calculation and an estimate, and frequency of the calculation, will depend on the volatility of the capital requirements and the own funds as well as on the level of solvency. These decisions are at the discretion of the insurer (group) and it is expected to be able to justify both the frequency and whether a full, partial or


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estimate of the calculation of the regulatory capital requirements is undertaken. A full calculation is however required where the risk profile changes significantly.

1.66. Changes in the risk profile of an insurer (group) will affect the SCR and MCR and be reflected in the capital management processes. Risk management decisions should take into account the overall solvency needs, regulatory capital requirements and financial resources (own funds) of an insurer (group). In considering own funds the following should be taken into account: a) The extent to which eligible own funds are greater than SCR (SCR cover) and the loss which

an insurer (group) can absorb before breaching SCR; and/or

b) Whether it already holds sufficient funds to meet an increase in SCR because an increase in

the SCR could mean items which were previously ineligible, due to the operation of the limits,

may become eligible as a result of an increased SCR.

1.67. The assessment also needs to consider the changes to the own funds position that might occur in

stressed situations. The insurer (group) is expected to carry out stress tests and scenario analyses to assess the resilience of the business.

1.68. In considering the quantity and quality of own funds the following should be considered: a) Mix between basic and ancillary own funds, also between tiers, their relative quality and loss

absorbing capacity.

b) How it can ensure compliance with SCR and MCR following a reduction in own funds

1.69. The ORSA should consider future own fund requirements. This includes a) Capital management including, at least issuance, redemption or repayment of capital

instruments, dividends and other distributions of income or capital, and calls on ancillary own

fund items. This has to include both projected changes and contingency plans in the result of

a stressed situation;

b) The extent to which the insurer (group) relies on own fund items under transitional

arrangements and the period until these provisions expire;

c) The interaction between the capital management and its risk profile and its expected and

stressed evolution;

d) If required, its ability to raise own funds of an appropriate quality and in an appropriate

timescale. This has to have regard to: its own access to capital markets; the state of the

markets; its dependence on a particular investor base, investors or other members of its

group; and the impact of other undertakings seeking to raise own funds at the same time; and

e) How the average duration of own fund items (contractual, maturity or call dates), relates to

the average duration of its insurance liabilities and future own funds needs.

1.70. The insurer (group) also assesses and identifies relevant compensating measures and offsetting actions it realistically could take to restore or improve capital adequacy or its cash flow position after some future stress events.

Guideline 11 – Technical provisions

As part of the ORSA, the insurer (group) should ensure that the actuarial function

provides input concerning the continuous compliance with the requirements regarding

the calculation of technical provisions and the risks arising from this calculation.

1.71. Assessing whether the requirements relating to technical provisions are being complied with continuously requires processes and procedures relating to a regular review of the calculation of


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the technical provisions to be in place. For groups, the assessment of compliance with the technical provisions at the solo insurer level may be referenced within the group ORSA rather than requiring groups to perform their own (duplicate) assessment.

1.72. The input regarding the compliance with requirements and risks arising from the calculation of technical provisions has to be in line with the information contained in the annual report of the actuarial function.

Guideline 12- Deviations from assumptions underlying the SCR calculation

The insurer (group) may initially assess deviations between its risk profile and the

assumptions underlying the SCR calculation on a qualitative basis. If this assessment

indicates that the insurer (group)’s risk profile deviates materially from the assumptions

underlying the SCR calculation, the insurer (group) should quantify the significance of

the deviation.

1.73. The assessment of the significance with which the risk profile of the insurer (group) deviates from

the assumptions underlying the SCR calculation is an important tool in ensuring that the insurer (group) understands the assumptions underlying its SCR calculation and considers whether those assumptions are appropriate. To do this, the insurer (group) will have to compare those assumptions with its own understanding of its risk profile. This process needs to prevent an insurer (group) from simply relying upon regulatory capital requirements as being adequate for its business.

1.74. If the standard formula is used, the insurer (group) has to assess the material deviations of its specific risk profile against the relevant assumptions underlying the (sub) modules of the SCR calculation according to the standard formula, the correlations between the (sub) modules and the building blocks of the (sub) modules.

1.75. The areas in which differences between the insurer (group)’s risk profile and the assumptions underlying the SCR calculation may arise to which the insurer (group) needs to give due consideration are: from risks that are not considered in the standard formula and from risks that are under/overestimated by the standard formula compared to the risk profile. The assessment process could include: a) An analysis of the risk profile and an assessment of the reasons why the standard formula is

appropriate, including a ranking of risks; b) An analysis of the sensitivity of the standard formula to changes in the risk profile, including

the influence of reinsurance arrangements, diversification effects and the effects of other risk mitigation techniques;

c) An assessment of the sensitivities of the SCR to the main parameters, including undertaking-specific parameters;

d) An elaboration on the appropriateness of the parameters of the standard formula or of undertaking-specific parameters;

e) An explanation why the nature, scale and complexity of the risks justify any simplifications used; and

f) An analysis of how the results of the standard formula are used in the decision-making process.

1.76. If the outcome of this qualitative and quantitative assessment is that there are significant

deviations between the risk profile of the insurer (group) and the SCR calculation, the insurer


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(group) needs to consider how this could be addressed. It could decide to align its risk profile with the standard formula, to use insurer (group)-specific parameters, where this is allowed, or to develop a (partial) internal model. Alternatively, the insurer (group) could decide to de-risk.

1.77. It is unlikely that the insurer (group) can determine whether the risk profile deviates significantly from the assumptions underlying the SCR by comparing the amount of the overall solvency needs as identified through the ORSA with the SCR. Since overall solvency needs and SCR can be calculated on different bases and may include different items, the amounts produced will not be readily comparable. There are a number of reasons that could account for the differences that have nothing to do with deviations of the risk profile, such as: a) The insurer (group) may operate at a different confidence level or risk measure for business

purposes compared to the assumptions on which the SCR calculation is based. For instance, it may choose to hold own funds for rating purposes, which represents a higher confidence level than that used to calibrate the SCR.

b) The insurer (group) may use a time horizon for its business planning purposes that differs from the time horizon underlying the SCR.

c) In the ORSA, the insurer (group) may consider any agreed management actions that could influence the risk profile.

1.78. Insurers (Groups) should also provide an explanation within the ORSA of key differences

between economic and financial measures.

Internal model users 1.79. Where the insurer (group) uses an internal model for the calculation of the SCR, the insurer

(group) needs to demonstrate that the internal model plays an important role in the ORSA.

1.80. An internal model is in itself a tool for the ORSA and the ORSA is a tool for the internal model in the sense that the performance of the ORSA gives input to the on-going exercise of ensuring compliance with the tests and standards. According to the requirements, internal model users have to comply, at the approval date and in an on-going concern, with the use test, statistical quality standards, calibration standards, profit and loss attribution test, validation standards and documentation standards. Each feature of the ORSA could play an important role in this exercise.

Internal model users - Overall Solvency Needs 1.81. To pass the use test, approved internal models must play an important role in the ORSA. This

does not necessarily mean that the assessment of the overall solvency needs is solely accomplished by running the internal model.

1.82. In this context, the ORSA includes the assessment of: a) the impact of the excluded material risks or major lines of business on the solvency position

in the case of a partial internal model; b) the interrelationship between risks which are in and outside the scope of the model; and c) the identification of risks other than those covered by the internal model, which may trigger a

change to the internal model

Internal model users - Deviation from assumptions underlying the SCR calculation

1.83. The insurer (group) has to assess the assumptions underlying its calculation of the SCR according to its internal model in order to ensure they remain adequate and that the internal model continues to reflect its risk profile appropriately.

Guideline 13 - Link to the strategic management process and decision-making framework


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The insurer (group) should take the results of the ORSA and the insights gained in the

process into account at least for the system of governance including medium-term

capital management, business planning and product development and design.

1.84. In deciding on the business strategy the insurer (group) has to take into account the output from the ORSA.

1.85. As an integral part of the business strategy, an insurer (group) needs to have in place its own strategies for managing its overall solvency needs and regulatory capital requirements and integrating this with the management of all material risks to which it is exposed. This highlights the need for very clear risk appetite statements that cascade through to all areas of strategic importance. The ORSA thus feeds into the management of the business, in particular into the strategic decisions, operational and management processes.

1.86. The ORSA should include assessments of an insurer and insurance group’s adequacy of current and future internal (economic) capital resources given its risk appetite and tolerance levels. Current and future capital levels should take account of longer term business strategies, risk tolerances, current and new business plans and risk mitigation processes and techniques. An insurer should understand how its risk management and capital management approaches and processes interact and thus determine how best to optimise its capital base, transfer or retain risk and price risk.

1.87. The ORSA is required to reflect the business strategy. When performing the ORSA, the insurer (group) hence takes into account the business strategy and any strategic decisions influencing the risk situation and regulatory capital requirement, as well as overall solvency needs. In reverse, the Board and senior management need to be aware of the implications strategic decisions have on the risk profile and regulatory capital requirements and overall solvency needs of the insurer (group) and to consider whether these effects are desirable, affordable and feasible given the quantity and quality of its own funds. Any strategic or other major decisions that may materially affect the risk and/or own funds’ position of the insurer (group) should consider the impact on the insurer (groups)’s solvency and risk profile before such a decision is taken. Depending on the magnitude or significance of the proposed decision, this may not always require a full ORSA process and management may perform a simplified analysis.

1.88. Where the insurer (group) is relying on management processes, in particular systems and controls in order to mitigate risks, it should consider the effectiveness of those systems and controls in a stress situation.

Guideline 14 - Frequency of the ORSA

The insurer (group) should perform the ORSA at least annually. Notwithstanding this, the

insurer (group) has to establish the frequency of the assessment itself particularly taking

into account its risk profile and the volatility of its overall solvency needs relative to its

capital position. The insurer (group) should justify the adequacy of the frequency of the

assessment.

1.89. The ORSA has to be performed on a regular basis and in any case directly following any significant change in the risk profile of the insurer (group).

1.90. The timing of the ORSA should be appropriate so as to demonstrate that it is embedded in the business and is used in strategic decisions.


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1.91. The ORSA performed after any significant change of the risk profile is called a non-regular ORSA. In this regard, insurers (groups) are expected to use their experience from stress tests and scenario analyses to determine whether changes in external factors could impact the insurer (group)’s risk profile significantly.

1.92. Such changes may follow from internal decisions and external factors. Examples are: the start-up of new lines of business; major amendments to approved risk tolerance limits or reinsurance arrangements, internal model changes, portfolio transfers or major changes to the mix of assets.

Section IV: Group specificities of the ORSA

Guideline 15 – Scope of the Group ORSA

The group should design the group ORSA to reflect the nature of the group and its risk

profile. All entities that fall within the scope of group supervision should fall within the

scope of the group ORSA. This includes (re)insurance, regulated non-(re)insurance and

non-regulated entities.

1.93. The group ORSA should include all specificities of the group, at least the following: a) Risks specific to the group (e.g. stemming from non-regulated entities, interdependencies

within the group and their impact on the group’s risk profile). b) Risks that may not be relevant or taken into account at solo level, but have to be considered

at group level (e.g. contagion risk). c) Differences between entities in the group such as business strategy, business planning

period and risk profile.

1.94. Although third country insurers that are not subject to the SAM regime are not required to produce solo ORSA supervisory reports, the group ORSA should include these entities in the group results.

1.95. Groups should consider any restrictions or challenges to the assessment at group level that may arise from third country entities.

Regulated non-(re)insurance undertakings

1.96. In addition to (re)insurance entities, the group ORSA should include risks arising from regulated non-(re)insurance entities and non-regulated entities.

Non-regulated entities

1.97. Whilst non-regulated entities are not subject to solo supervision and are not expected to perform an ORSA at the solo level, they have to be included in the scope of group ORSA if they fall within the scope of Group supervision.

1.98. The nature of the assessment with respect to non-regulated entities will depend on the nature, size and complexity of each non-regulated entity and its role within the group. Some non-regulated entities may play a very important role in setting the strategy and hence risk profile at the group level which is implemented throughout the group. On the other hand, non-regulated entities such as insurance holding companies may be just instrumental (e.g. to acquire holdings in subsidiaries. The group ORSA will have to be dynamic enough to capture the different nature of material risks from all non-regulated entities within the scope of the group.


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Guideline 16 – Scope of the Group ORSA

As per the Position Paper, the default position is that all SAM supervised (re)insurers

should have an ORSA process in place and produce an ORSA supervisory report to the

Regulator. Where entities form an insurance group, an ORSA should also be produced at

group level. However, insurance groups could request a dispensation from the

Regulator not to produce ORSA supervisory reports for solo entities, but a single group

supervisory report providing enough information for the Regulator to exercise its

supervisory duties in respect of solo entities approved under aforementioned

dispensation.

Guideline 17 – Assessment of overall solvency needs

The group ORSA should adequately identify, measure, monitor, manage and report all

group specific risks and the interdependencies within the group and their impact on the

group risk profile. This should take into consideration the specificities of the group and

the fact that some risks may end up being magnified at the level of the group.

The group should explain the key drivers of the overall solvency needs of the group

including any diversification effects assumed.

1.99. The group ORSA should identify the impact on the group solvency and related entities arising

from all material risks that the group is facing. In addition to risks considered in the SCR

calculation, all risks including group specific risks particularly risks that are not easily quantifiable,

have to be taken into consideration.

1.100. The group ORSA should also assess the materiality of risks that arise at the level of the group

and are specific for groups and thus cannot be identified at the solo level. Hence those group

specific risks are not taken into account in the consolidation or aggregation process (depending

on the choice of calculation method used), but are rather captured directly at group level.

1.101. The group specific risks include at least:

a) contagion risk (spill-over effect of risks that have manifested in other parts of the group);

b) risks arising from intra-group transactions and risk concentration, notably in relation to:

i. participations;

ii. intra-group reinsurance or internal reinsurance;

iii. intra-group loans;

iv. intra-group outsourcing;

d) interdependencies within the group and their impact on the group risk profile;

e) currency risk;

f) risks arising from the complexity of the group structure.

1.102. The group ORSA document should also include:

a) a description of the materiality of each related entity at the group level, particularly the

contribution of each related entity to the overall group risk profile.


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b) the outcome of the comparison between the group overall solvency needs and the sum of the

solo overall solvency needs; and an assessment of any diversification effects assumed at the

group level.

1.103. A group specific component of the group ORSA, compared to the solo ORSA, is the analysis of diversification effects assumed at group level. This includes analysis of the reasonableness of the diversification effects assumed at the group level (i.e. the difference between the group SCR and the sum of solo SCRs) compared to the risk profile of the group and the overall solvency needs of the group.

1.104. The analysis of the diversification effects at group level generally includes: a) A determination of the difference between group SCR and sum of the solo SCRs.

b) Objective and economic allocation of the difference in the above difference to each entity of

the group, taking into account any ring fencing arrangements that may exist at the group

level.

c) Appropriate sensitivity analysis, stress and scenario tests (e.g. how an envisaged material

change in the group structure such as selling some related entities may impact on the

diversification effects at group level and the overall group solvency).

d) Consistency of diversification effects assumed between different related entities of a group

and for each related entity, the consistency of diversification effects assumed between

different risk drivers.

Guideline 18 – General guideline for group ORSA

The record of the group ORSA should include, in accordance with Guideline 5, a

description on how the following factors were taken into consideration in the forward-

looking perspective:

1. identification of the sources of own funds within the group if additional new own funds

are necessary;

2. the assessment of availability, transferability and fungibility of own funds;

3. references to any planned transfer of own funds within the group and its

consequences;

4. alignment of individual strategies with those that are established at the level of the

group; and

5. specific risks to which the group could be exposed.

1.105. It is expected that the ORSA policy outlines additional stress tests and scenario analyses at the level of the group. Such tests include the risks that are specific to groups or materialise only at group level.

Guideline 19 – Internal model users

Where the group internal model is used in the solvency assessments at both the group

and solo insurer levels, the group should identify entities (if any) which do not use the

group internal model and the underlying reasons in the group ORSA supervisory report.


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1.106. This guideline is applicable both where an internal model is used at a group level or where group results are aggregated from solo entities using internal models or partial internal models.

Guideline 20 – Factors to consider when preparing a single group ORSA supervisory

report including solo results

When submitting a single ORSA supervisory report, subject to the agreement of the

group supervisor, the group should provide an explanation on how the subsidiaries

subject to ORSA solo requirements under SAM are covered and how the subsidiaries’

boards of directors are involved in the assessment process and approval of the outcome.

1.107. Where groups apply to submit a single ORSA document, this document needs to reflect the nature, scale and complexity of the group and the risks within it. The single ORSA document focuses on the material parts of the group, but it does not exempt subsidiaries from the obligations relating to the ORSA at solo level. This means that the single ORSA supervisory report also has to document the assessments undertaken by insurance and reinsurance subsidiaries at the solo level.

1.108. If a group plans to apply for an exemption from producing solo ORSA supervisory reports and submit a single group ORSA supervisory report, the board of directors of the group needs to take into consideration the following criteria when assessing the appropriateness of submitting a single group ORSA document: a) Where relevant, the appropriateness of the scope of the internal model (e.g. if a group

internal model is used to calculate both group and subsidiaries’ SCR).

b) The results of each subsidiary concerned are individually identifiable in the foreseen structure

of the single ORSA document to enable a proper supervisory review process to be carried out

at the solo level by the solo supervisors concerned;

c) The single ORSA supervisory report satisfies all the requirements of the supervisor.

Guideline 21 – Link to strategic decisions

Where groups report their group ORSA in other additional formats such as according to

material business units in their single group ORSA supervisory report, they should

ensure that there is adequate and clearly identifiable documentation for each solo

insurer where an ORSA supervisory report is required.

1.109. Solo entities for which ORSA supervisory reports are required must be separately identifiable in the group ORSA for supervisory purposes. However, the group ORSA has to reflect the way insurance groups are managed, in order to ensure a proper link to management processes. As such, the group may report their group ORSA along material business units for example in line with their group ORSA so long as the documentation in respect of each solo insurer is clearly identifiable and adequate for the purposes of the solo supervisors concerned.

Guideline 22 - Integration of related third-country insurers and reinsurers

In the group ORSA supervisory report, the group should adequately assess the risks of

the business in third countries (not subject to SAM supervision) with special attention to

transferability and fungibility of capital. This requirement does not imply that


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calculations of regulatory capital and a market-consistent balance sheet in accordance

with the SAM regime should be performed for third countries not assessed as equivalent

to SAM.

1.110. The group needs to assess the transferability and fungibility of the third country insurer own funds. The assessment must explicitly identify the regulation of the third country that may hinder or impede the full fungibility and transferability of the own funds of the subsidiaries of such third country towards to any other insurer of the group.

1.111. If a third country entity is included in the regulatory group solvency assessment using local rules, the assessment of the significance with which the risk profile of the subsidiary of such third country entity deviates from the assumptions underlying the solvency capital requirement, shall refer to the capital requirements as laid down in the regulations of such a third country.


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Annexure 1: Further Explanatory notes

1. Explanatory note to the SAM Recommendation’s Introduction section

Below is a graphical representation of how quantitative solvency could be presented in the

ORSA, using the SCR as an example:

For the current date solvency the SCR could be adjusted for quantifiable risks faced by an insurer (group) that have not been included in the SCR, due to differences between the regulatory solvency and economic environment. One such example may be that insurers (groups) are targeting specific credit ratings and are using different confidence levels to quantify economic capital requirements to the 99.5% used to quantify the regulatory SCR.

Additional capital may be required by insurers and groups to be held as buffers due to the Boards’ risk appetite or tolerance for risk taking being at more prudent levels than implied by the SCR calculation.

There may also be other adjustments to the SCR that insurers (groups) wish to make to quantify their economic capital requirements.

Management should project the business over the business planning period and calculate the regulatory and economic solvency positions to ensure solvency over the business planning period. These forward projections need to be synchronised with the business planning assumptions such as volumes of new business, economic and demographic changes, etc. Regulatory and economic solvency projections do not have to be calculated separately for each year included in the business planning period.

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