[Framework] Solvency II - Part 4 - ORSA

BACKGROUND
A continuation from previous post, this post covers ORSA’s components, processes and how each stake holders contribute.

ORSA requires a joint approach across the company as it encompasses the following:-

1. All pillars of Solvency II

2. Risk Outputs

3. Capital and Strategic Planning

4. Report to the Board on Company's Operation

5. Capital Requirements

6. Risk appetite and external environment.

JOINT EFFORT

Below is a table on how each departments  in insurers can contribution to the ORSA process

No.	Department	Roles
1	ACTUARIAL	-Technical provisions -Suitability of methodology/model, assumptions and date
2	RISK MANAGEMENT	-Identify and assess emerging risks. -Oversea aggregated view on risks exposures, risks profiles.
3	UNDERWRITERS	-Identify, assess monitor and report underwriting risks exposure.
4	IT	-System enhancements. -Data quality/documentation framework
5	INVESTMETNT	-Identify, assess monitor investment exposures.
6	FINANCE	-Provide financial information for strategic/business plans.
7	COMPLIANCE	-Identify, assess, monitor and report compliance risk exposures.
8	INTERNAL AUDIT	-Review ORSA process and reports

GOOD RISKS AND CAPITAL MANAGEMENT PROCESS

Apart from compliance compenents, its important to consider the business aspects into ORSA to increase return of capital, capital effectiveness and risk positions. Details of business aspects in ORSA as follows:-

1.Identify Business Opportunities

-Positioning relative to competitors/market shares

- Geographic and growth targets

-sync performance measures to align with strategy and risks

2.Formulate Risks Appetite Criteria

-Consider Solvency ratios

-Capital at risks and incorporate other qualitative measures

3.Formulate CMP
-Assess of actual risk profiles and assessments of compliance with internal and regulatory risk/capital requirements.

-ROC targets (MCEV earnings relative to RBC)

-Capital Fungibility.

END TO END ORSA PROCESS

Below is a table explaining the ORSA process beginning from stakeholder's inputs and ending with reports to the users.

1. Stakeholders	2. Inputs	3. Assessments	4. Outputs	5. Users
-Risk Management -Finance -Actuarial -Technical/  product/  Committees -Boards	-SII BS -Economic BS -Risk Appetite -Risk Assessments done -long and midterm plans	-Current solvency -Projected position -Risk Management Review  -Capitals required -Assumptions query -Scenario and stress testing	-Documented ORSA process -Internal and external ORSA report -Sensitivity of business strategies to potential and inherent risks	-Board -Risks -External parties -Business functions

BNM ITCL

In regards to ORSA & ERM frameworks, BNM has introduced an Individual Target Capital Level (ITCL) under the Risk-Based Capital Framework for Insurers. Below are excerpts from the BNM GL. [BNM/RH/GL 003-24]

“Each insurer is therefore, expected to set an Individual Target Capital Level that better reflects its own risk profile and risk management practices. The Bank expects the Individual Target Capital Level to include additional capacity to absorb unexpected losses beyond those that are covered by the Framework. In general, the Individual Target Capital Level should be higher for insurers with higher risk profiles or weaker risk management practices. The assessment of an appropriate Individual Target Capital Level should be performed by the insurer by conducting appropriate stress and scenario tests.”

“The board of directors is primarily responsible for setting the Individual Target Capital Level and ensuring that the insurer has in place an appropriate capital management plan that takes into account its strategic business direction and the changing business environment. The Bank also expects each insurer to establish adequate processes to monitor and ensure the maintenance at all times of an appropriate level of capital which is commensurate with its risk profile.”

SETTING ITCL

Guidance on setting of ITCL is in BNM’s Guidelines on ICAAP for insurers. [BNM/RH/GL/003-29]

“The ITCL should provide a robust threshold in the management of an insurer’s capital adequacy, where a breach of this level should trigger timely responses by management to restore capital to the ITCL (including restrictions on payment of dividends) and heightened board scrutiny.”

 BNM's miniumum requirement for ITCL as follows with item 3 involving every stakeholder in the organization.

“The ITCL must be set, at the minimum, such that:

1-It takes into account plausible adverse scenarios that may arise over at least a one year time horizon.

2-the insurer has a CAR at the ITCL before the occurrence of selected plausible adverse scenarios, the insurer is able to maintain a CAR above the supervisory target capital level of 130% after the occurrence of those scenarios; and

3-it takes into account all changes in risk profile arising from planned business and operational activities over the period of projection.”