Friday, 29 March 2013

EIOPA Preparatory Guidance - ORSA (or 'forward looking assessment of risks')

Forward-looking assessment of the undertakings own risks (based on ORSA principles) (plus explanatory text)

The ORSA preparatory guidelines* are not a massive burden for anyone busy rolling eggs down hills at the moment, coming in at 34 pages containing 25 guidelines, as well as 29 pages of explanatory text. In this instance, it is probably disappointing to any underprepared supervisors and insurers in that they may have preferred more!

More pointedly, the materials add little to what was already in existence from EIOPA in July 2012, and certainly will required little in the way of adaption in the UK's instance, who are already in a similar headspace and have been advising accordingly.

Of course the world and her husband have piped up with their opinion on what ORSA should cover and how it should be administered and documented (this post has a decent sweep at capturing most of them), so opinion on this matter is something we are not short on.

For me the headline points are:
  • ORSAs (well, 'overall solvency needs assessments', but let's be serious!) expected from 2014
  • Internal Models should be used by anyone in pre-application
  • Likely that most standard formula firms will have to qualitatively assess deviations between SF and their own Risk Profile at this time
  • Expectation of an internal ORSA report and a ORSA supervisory report
  • Records of the assessment expected to be documented and kept which must be "appropriate" - no prescription of what that means
  • ORSAs to be performed at least annually
The following points are either new, or worthy of reiteration for anyone whose preparations on this front are less than certain - for ease of reference I have used 'ORSA' where EIOPA use 'forward looking assessment of risk', and as with the other preparatory guidance papers I have looked at, I will assume there will be blanket application as written, with no dissent from industry or NCAs:

Guideline 3
  • Overall Solvency Needs assessments will be expected from 2014 (i.e compliance with Article 45.1)
  • Minimum of 80% of the market must also assess whether they would comply with the Articles 45 (b) and (c) from 2014 - regardless of any Pillar 1 uncertainty.
  • Internal Models expected to be used in ORSAs if a company is in model approval pre-application
  • IF the standard formula is 'provided' by 2014, expectation that SF firms will assess deviation between the SF assumptions and their own Risk Profile - this excludes anyone outside of the magic 80% catchment figure mentioned above.
Guideline 6 - Documentation generated by ORSAs must include:
  • An ORSA Policy
  • An ORSA Record
  • An Internal ORSA Report
  • AN ORSA Supervisory Report
Guideline 7 - The ORSA Policy must include
  • Description of component ORSA processes and procedures
  • Consideration of the linkages between Risk Profile, Risk Tolerances and Overall Solvency Needs (OSN)
As well as information on
  • frequency on stress tests, scenario analyses and reverse stress tests; 
  • data quality standards; and 
  • the frequency of the assessment, justified in relation to Risk Profile, volatility of OSN relative to capital position, timing (from calendar perspective I guess) and circumstances for ad-hoc assessments
Guideline 8 - ORSA Record
  • Firms expected to "appropriately evidence" the assessment - no prescription as to what that means (logs, working papers, meeting minutes, e-mails)
Guideline 9 - Internal ORSA Report
  • AMSB must communicate results to "all relevant staff" post-approval, which includes the ORSA results and conclusions
Guideline 10 - ORSA Supervisory Report
  • 2 weeks after concluding ORSA, ORSA supervisory report must be submitted, which must include;
  • Quantitative and qualitative results, and conclusions drawn
  • Methods and main assumptions
  • Comparison between Own Funds, SCR and OSN
Guideline 11
  • Must quantitatively estimate the impact of different valuation bases (if used) when assessing OSN
Guideline 12
  • OSN must be quantified, supplemented by a qualitative description of all material risks
  • Expectation that these items are all stress/scenario tested
Guideline 17ORSA output to be used at least for;
  • Capital Management
  • Business Planning
  • Product Development
Guideline 18
  • ORSA to be performed at least annually

* So let's end with something fundamental, EIOPA - it is NOT useful to replace 'ORSA', as an acronym or indeed in full, with the expression "Forward-looking assessment of risk (based on ORSA principles)" 5 years down the road - I'm sure there is a rationale, just as sure as I am not going to like it (even the GCAE agree with me, going with 'ORSA-like')!

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