Solvency II: Unlocking the mystery of the risk framework around ORSA
Solvency II, the new set of regulations for insurance companies operating in the European Union, will usher in myriad changes for this industry. Insurers have less than three years to comprehend and apply these changes, as the tentative deadline for implementation is 31 October 2012.
One of the biggest challenges firms will face under Solvency II involves undertaking their Own Risk and Solvency Assessment (ORSA), a company’s economic view of the capital required to run its business regardless of requirements set by regulators. Through ORSA, companies must demonstrate “sound and prudent management of the business” and assess overall solvency needs. The ORSA is a powerful risk management tool that board members and senior executives can employ to assure themselves that the firm has a proper process for identifying and managing risks to the business, and that the process actually works.
ORSA also requires a strategic approach in order to implement it effectively, as it must be integrated into a firm’s enterprise risk management framework. That said, it is useful to consider ORSA in terms of five principles that tie into the entire company at:
1. Risk identification: The ORSA should encompass all material risks.
2. Risk assessment and management: The ORSA should be based on adequate measurement and assessment processes.
3. Integrated policy framework: The ORSA process should be appropriately evidenced, internally documented and independently assessed.
4. Integrated stress and scenario testing: The ORSA should be forward-looking, taking into account business plans and projections.
5. Robust management and oversight function: The ORSA should be regularly reviewed and approved by administration and management.
Executing on these principles will require many firms to undertake fundamental challenges. This article explains these principles in detail, and how insurers can successfully implement ORSA to build business value.