ORSA

Question 1

Definition of ORSA (1)

Answer 1

A confidential internal self-assessment of the risks associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks

Question 2

Requirements of ORSA (3)

Answer 2

Requirements for an insurer subject to ORSA:

1. Conduct an ORSA at least annually to assess the adequacy of its risk management framework and solvency position
2. Internally document the process and results of the assessment
3. Provide a confidential high-level ORSA summary repot annually to the lead state commissioner if the insurer is a member of an insurance group, and, upon request, to the domiciliary state regulator

Question 3

Definition, requirements, and goals of an ORSA (1)

Answer 3

Foster an effective level of ERM at all insurers, through which each insurer identifies, assesses, monitors, prioritizes, and reports on its material and relevant risks, using appropriate techniques and in a manner that is adequate to support risk and capital decisions

Question 4

Major sections of an ORSA Summary Report (3)

Answer 4

1. Section 1 – description of the insurer’s risk management framework
   a. Describe how the insurer identifies, categorizes, and manages risks
   b. Describe risk-monitoring processes and methods, provide risk appetite statements, and explain the relationship between risk tolerances and risk capital
   c. Identify assessment tools used to monitor and respond to any changes in risk profile
   d. Describe how the insurer incorporates new risk info in order to monitor and respond to changes in risk profile
2. Section 2 – insurer’s assessment of risk exposure
   a. Provide a high-level summary of the quantitative and/or qualitative assessments of risk exposure in both normal and stressed environments for each material risk category in Section 1
   b. Include descriptions of risk-mitigation activities and outcomes of any plausible adverse scenarios assessed
3. Section 3 – group assessment of risk capital and prospective solvency assessment
   a. Group assessment of risk capital – the goal is to provide an overall determination of risk capital needs and to compare that to available capital to assess capital adequacy
   b. Prospective solvency assessment – should demonstrate that the insurer has the financial resources necessary to meet regulatory capital requirements and execute its multi-year business plan. If the insurer doesn’t have the necessary available capital, then describe management actions to remedy the situation

Question 5

Key info to include in an ORSA summary report (3)

Answer 5

1. The basis of accounting and the date or time period that the numerical information represents
2. The scope of the ORSA conducted (ie which insurers are included)
3. A short summary of material changes to the ORSA from the prior year

Question 6

Key principles of an effective ERM framework (5)

Answer 6

1. Risk culture and governance
   a. A governance structure that clearly defines role, responsibilities, and accountabilities
   b. A risk culture that supports accountability in risk-based decision making
2. Risk identification and prioritization process – the risk management function is responsible for ensuring that the process is appropriate and functioning properly at all organization levels
3. A formal risk appetite statement and associated risk tolerances and limits – understanding of the risk appetite statement ensures alignment with risk strategy by the board of directors
4. Risk management and controls – managing risk is an ongoing EM activity, operating at many levels within the organization
5. Risk reporting and communication – provides key constituents with transparency into the risk-management process. Facilitates active, informal decisions on risk-taking and management

Question 7

Considerations in quantifying available capital and risk capital (9)

Answer 7

1. How the insurer defines solvency for the purpose of determining risk capital and liquidity requirements
2. The accounting or valuation basis for measuring risk capital requirements and available capital
3. The subset of business included in the analysis of capital
4. The time horizon over which risks were modeled and measured
5. The risks modeled in the measurement of risk capital
6. The method used to quantify the risk exposure (eg stress tests)
7. The risk capital metric used in determining aggregate risk capital (eg value at risk)
8. The defined security standard used in determining risk capital requirements
9. The method of aggregation of risks and any diversification benefits considered

Question 8

ORSA includes ongoing processes to support (7)

Answer 8

1. Risk identification and prioritization
2. Risk measurement
3. Articulation of risk appetite and tolerances
4. Implementation of risk limits and controls
5. Development of risk mitigation strategies
6. Capital adequacy assessment
7. Governance and risk reporting

Question 9

Assessment of group wide capital adequacy should consider (5)

Answer 9

1. Elimination of intra group transactions and double gearing (where cap is used simultaneously as buffer against risk in 2 or more entities)
2. ) level of leverage resulting from holding company debt
3. ) Diversification credits and restrictions on fungibility of cap (ability to deploy avail cap from one entity to another)
4. ) Effects on contagion risk, concentration risk, and complexity risk
5. ) Effect of liquidity risk due to Econ factors