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The document takes care to reference the at-the-time EIOPA guidelines in each chapter (which would have been superseded by June's release of course, but didn't change seismically), and does an excellent job of focusing on required processes as opposed to ORSA Reporting, which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

Society of Actuaries in Ireland Newsletter - ORSA, Solvency II and Cocktails

Always a riveting read, the Irish Society of Actuaries fired out their newsletter for August, which as ever is a treasure trove for any diet-mathematicians like me who need to have things spelled out for them on all matters actuarial.

Of particular note was their report from the ORSA Working Party (p7), which covers a presentation and paper delivered earlier in the year - to show what a fantastic bunch the SAI are, you can access both the full working party paper (all 52 pages of it) and the presentation slides on their website. I picked out the following from the newsletter (I'll read the working party paper in more detail separately);

• "Compilation of the ORSA Document is quite a significant undertaking" - emphasising the difficulty in selling ORSA in purely process terms
• "ORSA is a risk management exercise, not a compliance exercise" - I would prefer to sell it as both, as it is unfair to undersell the compliance angle, particularly to smaller firms who may not have gone to the nth degree on projecting capital adequacy before.
• "ORSA needs to be readable..." - again, almost impossible not to talk about it as a report, rather than the report being the output of a process
• "ORSA would be of great interest to the Board" - I would hope that the Board would be queueing up next to the printer to get their hands on ORSA reporting output!
• Projecting the business planning period "...likely to be 3-5 years into the future" - interesting to see what the general consensus is on this (I feel this will fit most insurers, but if you are shooting for longer, would love to hear how you're doing it!)
• Some discussion over how prescriptive the Central Bank of Ireland may be on the ORSA documentation front (bearing in mind how liberal the FSA have been on this matter) - seems to suggest that a similar approach will be taken i.e. justify what you have.

There are a couple of nice pieces towards the back on unintended consequences of Solvency II and Basel III (on cost of capital and funding patterns), as well as some nice real world examples of why one should be wary of actuaries who manage to change internal model parameters in a way that magically reduces capital requirements each year!

The less said about the actuarial cocktail making class on the back page (complete with bottle of Kia-ora in centre shot) the better I suspect...

Society of Actuaries in Ireland Newsletter, April 2012 - ERM and ORSA features

Always a riveting read, the SAI pushed out their latest newsletter, which generally provides enough consumable detail on actuarial concept to help relative novices like me!

Get stuck in to the sections on contract boundaries, and the reason for professional vs EIOPA divergence on p4, some ERM activity over the last couple of months on p9 (and slides from those both here for ERM and here for ORSA). Some brief analysis of the older presentation from Towers Watson on ORSA is also summarised.

ORSA Presentation to Society of Actuaries in Ireland by Towers Watson

Nice and swift - TW's finest laid on a presentation to the Society of Actuaries over on the Emerald Isle on engaging the business in Solvency II through the ORSA.

Not really anything to dispute in this, bearing in mind we have had all the guidance that the EU institutions are prepared to give on the matter, but some interesting reference points on

• ORSA-type activity in other jurisdictions,
• Operationalising (my made-up word, not theirs!) risk appetite,
• Creating a positive risk culture,
• Modelling considerations, plus a nice slide on the difference in scope between "current actuarial models" that just spew out TPs and internal models 
• An ORSA 'health check'

Obviously cheaper to administer these views/tools yourselves than call the lads in, but if your wallet can stand it, they clearly know their onions!

CROs and the Society of Actuaries in Ireland - from the President's mouth

A subject very dear to my heart (from a self preservation perspective more than anything!) was the subject of additional comment in the President of the Society of Actuaries in Ireland when giving the president's address for 2011.

Whilst he naturally states (p8) that the head of the actuarial function roles will be the preserve of the current holders of appointed/signing actuary roles, and that "any other outcome would be bizarre", he then goes on to talk of the "big Solvency II prize for us as a profession" of leadership of the risk management function, which anecdotal evidence suggests is a role favouring the actuarial profession ahead of other disciplines.

Of course while I would love to counter the argument with the Institute of Risk Management's suite of arguments in favour of the risk management profession (blogged on extensively already), I then found that the latest CRO hire was of course an actuary (making the score 3-0 to the actuaries since I started keeping it)!

Time to step up our game 'Riskies'...

Society of Actuaries in Ireland - newsletter treats

As ever, the Society of Actuaries in Ireland produced a riveting read this month, with some hot topics covered very succinctly, and useful to multiple jurisdications for benchmarking.

Risk Appetite (specifically how best to communicate and document it) is particularly prominent with new obligations under the corporate governance code kicking in throughout this year, and the Society's ERM committee hauled in one of the CBIs top men to talk through options, with another couple of private sector big hitters. I spotted in particular;

• Risk Appetite Statement cannot be vague, and should include some financials
• Traffic Light system of monitoring was viewed favourably (amber being a warning sign to act)
• Breach alerts best in real time
• Solvency I and Solvency II measures matter - so don't rush for future state
• Very sketchy response on how to quantify "material" breaches of appetite, with no response documented from the regulator in this letter
• CBI want to know about "misses and near misses" - not quite sure about what the difference is frankly - are we now tiering 'misses' into categories? RAG's and traffic lights?
• No firm guidance on quantifying appetite for Op Risk
• Willingness (from the floor I imagine) for CBI to use standard definitions for risk appetite/tolerance/preference - amen to that brothers!
• Risk Appetite Statements should not be purely downside based

I must highlight the spectacular comment that "The risk appetite statement ensures decisions are made by the business rather than just by actuaries" - there's an eyeopener for all you insurance CEO's that thought you were the boss!

Some other very cute stuff included on Internal Model progress (a massive 45 models in the IMAP process - good luck staffing that!). On a serious note, one suggestion from the CBI was for 'independent validation' engagement documents to be submitted to the regulator to ensure they pass muster, which suggests there is a hot market for this type of service.

Two other parts of this jumped out. A sharp piece on diversification, where the CBI acknowledge that heavy use of expert judgement is anticipated, and point towards senior management understanding and ensuring the statistical quality standards can be met as aspects to consider.

The second linked piece was whether, as Insurance is a "mathematical business", that it is "not too much to expect" that the board and senior management to understand copulas and variance-covariance matrices.

You can tell that to the ex-politician NEDs first buddy...

Society of Actuaries in Ireland - Land grab for the Solvency II grey areas?

Having already blogged on the brewing discomfort of the Institute of Risk Management regarding the perceived preference of the FSA for Actuaries to run Risk functions under Solvency II (and had to follow up as the story developed), I was very interested to read through the Irish Society of Actuaries strategic plan released today.

There is definitely the beginnings of a land grab here, with a number of statements eagle-eying the juicy cuts of what is currently ascribed to the Risk function as per the extracts below;

“We also aim to have our members recognised as being committed to the highest standards

of skill and professionalism and well equipped to take up both actuarial and risk management

roles under Solvency II.”

"enhance the standing and role of actuaries within insurance and reinsurance

companies, and in particular, to enhance the standing of actuaries as risk managers"

"Promote the qualifications and relevant experience of actuaries as risk managers."

"Increase awareness of the CERA (Chartered Enterprise Risk Actuary) qualification."

"Another area that is becoming increasingly important for actuaries is risk management,

including the management of risks beyond financial risks. We have already delivered a

number of CPD events aimed at improving members’ knowledge and understanding of risk

management concepts and skills and this will remain an important area of focus."

And perhaps the most land-grabby target;

"Explore the feasibility of partnering with an appropriate university or similar body to

develop a comprehensive risk management training programme for actuaries who want

to skill up quickly in this area."

It's a good job I'm all about openness and competition, otherwise I might start to get an inferiority complex!