January 27th, 2016

Gaining Optimum Value from ORSA

Posted at 1:00 AM ET

Own Risk and Solvency Assessment (ORSA) was first introduced as a regulatory requirement as a result of Solvency II. (Re)insurers would be wise to take note of the many similarities between Solvency II and the National Association of Insurance Commissioners’ (NAIC) ORSA and, where possible, avoid reinventing the wheel when trying to implement them. Now, and especially with the introduction of the Insurance Capital Standard (ICS), it is increasingly important for (re)insurers to avoid unnecessary, redundant and duplicative activity in the attainment of regulatory satisfaction by striving for a uniform framework to establish risk management and controls, corporate governance, transparency and disclosures across borders. In so doing, (re)insurers will gain optimum value from their ORSA.

The primary objective of both the NAIC’s and Solvency II’s ORSA is for (re)insurers to be able to demonstrate to regulators that the legal entities or statutory companies and the group or holding companies have enough regulatory and economic capital to cover all of their risk and run their businesses. Interestingly enough, the ICS is all about creating a consistent capital measure across globally active (re)insurers and is supposed to provide a solution for group-wide supervisors to better manage capital allocation around an international business. In the wake of all of this regulation, (re)insurers would be wise to try and kill two regulatory birds with one stone. We expect the concepts of ORSA to play a significant role in (re)insurance supervision around the globe in at least the following areas:

1. Group capital assessments will be performed and examiners, analysts and regulators will use ORSA to assess groups’ own assessment and management of capital.

2. ORSA can also provide information to the supervisors in determining supervisory actions, including sanctions and even capital add-ons that supervisors can impose on (re)insurers.

3. ORSA should be used as a tool to help supervisors understand the (re)insurer’s risks and how risk and capital is managed.

4. A successful and effective Solvency II ORSA process should lend itself to a smoother transition into ICS, but (re)insurers in the United States will need to understand that ICS, as it is defined today, would be a considerable change for them. Although U.S. (re)insurers would also be wise to leverage the ORSA components in addressing the ICS calculation.

A possible consideration for U.S. (re)insurers is to examine the requirements for a complete ORSA Summary Report - specifically Section 3: Group Risk and Solvency. While ICS would mean a considerable change from the way U.S. (re)insurers plan on completing Section 3, there is no reason to think that ICS could not be used someday when completing this section of the ORSA Summary Report.

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