ORSA and ERM
Use the upcoming compliance deadline to boost existing ERM practices
After several years of planning and industry input, ORSA will soon become a reality for insurers. The time has come for insurers to actively plan compliance strategies.
Beyond compliance though, forward-looking insurers are emphasizing the strategic opportunity ORSA presents. Preparing for ORSA gives insurers an opening to boost existing enterprise risk management (ERM) practices—provided they look beyond a strictly "check the box" compliance-driven attitude.
ORSA can help bolster ERM functions because of its focus in these areas:
- Better use of risk capacity, while remaining within stated risk appetites
- Improved risk-based decision-making through a single framework for risk, capital and performance management
- Increased understanding of risk exposures across the enterprise
- Promotion of a risk-management culture and greater visibility for risk at the executive level
- Deeper insights into the solvency impacts of future economic conditions
- Clearer visibility into capital tiers supporting risk-taking activity and optimization of capital structures
ORSA's basic requirements mask nuances and strategic implications
Baseline ORSA requirements are deceptively simple. Insurers tempted to simply create a "check the boxes" summary report will miss the chance to strengthen their ERM capabilities.
In particular, there are four areas with significant gaps between minimal compliance (as delineated in the ORSA Guidance Manual) and ERM-boosting opportunities.
Future capital requirements
Group-wide risk and capital assessment
Future requirements are likely to be more complex, robust and prescriptive
ORSA makes clear that the length, depth and granularity of its requirements depend on the nature, scale and complexity of the business. Insurers are sure to find plenty of room for interpretation.
Moreover, risk-based capital (RBC) regulation in insurance and Basel guidelines for banks provide a template for ORSA's evolution. ORSA is highly likely to become a fundamental risk-reporting metric with more comprehensive reporting requirements and progress-tracking that includes annual updates and milestones to achieve.
ERM assessments are the best first step
Connection points between ERM frameworks and the ORSA process are numerous and direct. However, ERM frameworks alone are not sufficient for ORSA compliance.
Rather, ORSA assessments can help insurers evaluate their current ERM capabilities, identify gaps and prioritize improvement plans. For instance, ORSA can help insurers address common organizational challenges such as unclear or fragmented committee structures or lack of board engagement.
Assessing organizational readiness
Insurers can assess their readiness for ORSA by answering these questions:
1. Do you understand and comply to the requirements as stated by the ORSA Guidance Manual and the key components of ICP 16 on ERM?
Organizations answering "no" to any of these questions can take some comfort in knowing there is time to enhance their capabilities prior to ORSA's effective date.
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