Central Bank of Ireland and ORSA - fancy a bunch of FLAORs?

So the Central Bank of Ireland went and knocked together an ORSA Reporting tool for the less complex end of the Irish Insurance industry, specifically the "low" and "medium-low" rated insurers. And to think I have spent 4 years railing at the consultancy and supervisory industries for catering for the big boys, while ignoring the immaterial...


2014 FLAORs
- a serious affair

The tool was released back in July, and while it (intelligently?) copy-pastes EIOPA's guidance and dissects most of those words into a set of obvious questions, there are some aspects which are very revealing in respect of where supervisory expectations for 2014's ORSA reporting and process development efforts perhaps are at the less material end of the industry.

They have evidently taken the approach that most large programmes will have used over the last 3 years, namely to deconstruct paragraphs in Directive/Delegated Acts/EIOPA Guidelines in an Excel spreadsheet, and pose them as questions. Not every firm's budgets would have stretched to accommodate even that level of analysis though, so I'm sure the CBoI's efforts have been warmly received to date.

For example, the following elements are very shocking to me, given our proximity to go-live;

• No compulsion for ORSA Policy (and therefore process) to be documented and Board-approved in 2014 (2.3 and 2.4)
• No expectation that the 2014 version assesses one's ability to continue past the 1 year horizon (4.8)

These elements are perhaps revealing as to supervisory planning for 2015 and beyond;

• Asking when the Board approved the results and conclusions - likely to be hunting for evidence in minutes (2.2)
• Asking which personnel/units have been briefed as to the ORSA results - is there a feeling that outside of EXCOM and control functions, the reports won't see the light of day? (3.4)
• Highlight what they are really interested in, in the context of "overall solvency needs" quantification - risk measure, confidence level and time horizon, which feels proportionately light in focus given the detail in Article 262 of the Delegated Acts (4.1).

Some good elements include;

• Uses of ORSA in decision-making process listed in 1.1 - some are directly lifted from EIOPA, but couple of other examples may help focus the mind (I would add that setting "risk limits" feel sloppy, given the legislation uses "risk tolerance limits")
• Ask for a table to be populated with quantitative results for each risk category, but don't prescribe the category names, rather provide the legislative categories as examples - this is how it should be, especially for the smaller firms. (4.2)
• No expectation that the "medium or long-term" capital is calculated at this point - the column provided is marked *OPTIONAL* (4.2) 

Whilst the data gleaned from the template they have provided may be a bit cumbersome, fair to say that CBoI's efforts will be welcomed by both the qualifying firms (as a pro-forma) and the larger firms as an INED guide.

Society of Actuaries in Ireland on ORSA - a rock in a sea of turmoil

In these days of certainty around the Solvency II implementation timetable (i.e. certainly not 2014!), it’s nice to cling on to the consultant's comfort blanket of ORSA which, thanks to the IAIS and NAIC, isn’t disappearing in a hurry for global insurers. This item flagged on the SAI's newsletter last month, but dating back to April, would benefit anyone working in the ORSA space, being a "practical considerations" guide which is very accessible for non-actuaries, particularly for assessing or challenging options for the required ORSA processes.

 

The document takes care to reference the at-the-time EIOPA guidelines in each chapter (which would have been superseded by June's release of course, but didn't change seismically), and does an excellent job of focusing on required processes as opposed to ORSA Reporting, which these types of papers often do. Worth reading all but noting the following;

Overview

·     Proportionality - remember justification of approach is as important as executing the selected approach itself.

·     Documentation - "...Traditionally, this is not an area of strength for actuaries" - I'll drink to that!

ORSA Contributors

·     "It is likely" that Risk will co-ordinate the process. This logic follows on from the IRM’s survey findings (p2) which saw Risk as predominantly leading early process development, and there is nothing to suggest the other candidate functions are likely to be sufficiently staffed in the BAU world to both actively participate and co-ordinate.

·     Board as "owners” of the ORSA – this is an important point which, for practitioners, is awkwardly inferred by the Directive text, rather than spelled out. Indeed this document later goes on to say the Risk function "will likely be the owner of the overall ORSA process".

This gruesome melange of who owns what in the ORSA space (and indeed what 'ownership' confers), remains a little too common in thought papers like this, so be certain to define these elements in your ORSA Policy.

·     Capital Management function - "ORSA is the process where risk and capital management get together" - get a room you guys!

Policy and Process

·     Generally a very clean and useful section, particularly around "dynamic" and "static" processes and their outputs. Section on ORSA Report content is less useful, being based on the 2008 issues paper, and there are plenty of papers covering that topic (sift through yourself!).

·     Projection process - No suggestion of whether recommendations from balance sheet projection activity should be balled up in the ORSA Report or reported separately as part of conventional committee/Board reporting. I always found this element a nuisance to pin down, as one wouldn’t necessarily want to present material of such significance in a 20-200 page ORSA Report if it meant it didn’t get the appropriate table time at strategy days etc.

Economic Capital 

·     Practical obstacles - all seem to revolve around there being a shortage of actuarial time/resource. Well get off my land and go do some counting then!

EC and Risk Management

·     Document is a little unclear around risk appetite framework/risk management framework/risk management system terminology, which is a little unhelpful

·     Interesting comment regarding non-quantification of risk that "risks cannot be quantified" rather than "risks cannot be quantified easily" – this is an actuarial paper, you guys can quantify anything, surely!

·     Define reverse stress testing as "testing to destruction" - the UK definition is more discrete than this, and certainly more useful for stimulating debate in Board exercises

ORSA Projections

·     More industry consensus on what 'business planning period' constitutes, being 3-5 years. Barely seen anything to suggest firms venturing outside this window for projection purposes.

·     Nice simple explanation of the component parts of the economic balance sheet which should be projected as well as recommendations for projecting risk appetite metrics and the P&L.

·     Suggestion that, unless already stochastically projecting, firms will project deterministically, "unless the company is planning significant changes to its future business mix". Judging by the jostling for position around Long Term Guarantees right now, is that not likely to be quite a few!

·     Acknowledge that the approaches already used for Financial Condition Reporting should be leaned on for smaller or less complex entities.

Scenarios

·     Reverse stress testing has grown into a different beast from that reference earlier in the piece, incorporating "back-solving" (new one on me!), and looks for events that reduce own funds to zero - not sure I've heard RST defined like that before, and certainly not convinced that own funds of zero necessarily constitutes "destruction"

·     Good recommendation for selecting scenarios from emerging risk assessments as well as a firm’s existing quantum – best not to take the path of least resistance in this area of ORSA.

ORSA Consultation Paper from EIOPA - bon effort!

As I don't expect everyone had the time, inclination or even the document to see how the pre-consultation team of CEA/AMICE/CRO Forum/CFO Forum etc got on with the ORSA document, I had a cross-cast of the two to see if any substantive changes were made. The following caught my eye in the public consultation paper released yesterday;

• Almost complete removal of the participation of the supervisory authorities in ORSA - this is now being left to Supervisory Review Process guidelines (it was shoehorned in to the pre-consultation in a way that made its removal inevitable sadly).
• ORSA Policy content trimmed down in one respect (removing some actuarial-themed material, which will inevitably end up in the ORSA Report), but added in a section on data quality.
• Made the section on checking SCR assumptions to make sure they fit one's Risk Profile much more confusing by neglecting to state whether "SCR Calculation" in the paper means "Yours" or "Theirs" - it does eventually come out in the wash that they are talking about any mismatch in reality between the assumptions one uses to generate their SCR (whether internal model, partial model, some USPs or full standard formula) and those which would actually fit the business, but it is a poor piece of drafting.
• More rigorous on being able to justify frequency of regular ORSAs
• New section on applying the proportionality principle for methodological complexity, frequency and granularity of ORSA
• Finally had the courage to write the words "ORSA" and "Report" in the same sentence! This was skilfully avoided in the pre-consultation, I guess to enforce the (still legitimate) fact that ORSA is a process, not a boiler-plate report production job
• Having removed the pieces on supervisory participation, they naturally had to lose a piece on how the ORSA output would make its way to the regulator. It was planned to put it in with RSR (and was very convoluted), but now there will seemingly be an opportunity (not guaranteed) to put forward the internal ORSA Report to satisfy regulatory obligations
• More explicit on covering less-than-easily quantifiable risks, and allows for mitigants other than capital to be used in their regard over the business planning period, provided they are not material. I hasten to add here that they have changed the language on reputational and strategic risk from being "less quantifiable" to "non-quantifiable", which is a bit of a cop-out.
• Much more explicit on capital management, both planning and execution over the business planning period - I guess this is a result of pressure from both the SIFI angle as well as Eurozone/Credit Crunch
• Leaves an open ended question on whether the ORSA Process includes or uses the outputs of tests which are associated with ongoing compliance with Articles 120-125, but the option is there for both
• Spectacular typo on page 25 - looks like one of the bullet points has not made the cut, as we jump from A to C!
• Late Psot Script - missed the omission of the requirement to independently assess the ORSA Process - no doubt everyone's internal audit functions are breathing a sigh of relief!

All in all, a good attempt and I feel more than prescriptive enough for the public consultation to drive it further forward. Perhaps a missed opportunity on the regulatory requirements front to iron out what they ought to get out of the industry's ORSA reports from a wide range of stakeholders, but hey, you can't have everything...