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IASA 86TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
How is your ORSA coming along?
Session Number 104
June 9, 2014
1:30 – 3:00 p.m.
IASA 86TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Mary Peter, Director of ERM, Eide Bailly LLP
Scott Anderson, FCAS, MAAA, FCA
SVP & Actuary, Gross Consulting
ORSA Update Presented by:
Disclaimer
These seminar materials are intended to provide the seminar participants
with guidance in enterprise risk management (ERM) and Our Risk
Solvency Assessment (ORSA) matters. The materials do not constitute,
and should not be treated as professional advice regarding the use of any
particular ERM technique or ERM consequences associated with any
technique.
Every effort has been made to assure the accuracy of these materials.
Eide Bailly LLP and the author do not assume responsibility for any
individual's reliance upon the written or oral information provided during
the seminar. Seminar participants should independently verify all
statements made before applying them to a particular fact situation, and
should independently determine the ORSA, ERM or risk management
approach of any particular risk, risk management, ORSA or ERM
planning technique before using or recommending the technique to a
client or implementing it on the client's behalf.
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Learning Objectives
An understanding of NAIC's Own Risk and Solvency
Assessment (ORSA) Model Act #505 requirements for
2015
An understanding of the 2013 ORSA Pilot Program
An understanding of how the ORSA requirements may
impact a change in your company's ERM program.
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Why ORSA? Own Risk and Solvency Assessment
Proposed in U.S. due to Solvency II which was adopted by the European Commission
Part of NAIC’s Solvency Modernization Initiative
Two main goals of ORSA according to the NAIC: “To 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, identified by the insurer, using techniques that are appropriate to the nature, scale, and complexity of the insurer’s risks, in a manner that is adequate to support risk and capital decisions; and
“To provide group-level perspective on risk and capital, as a supplement to the existing legal entity view”
Source: NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual - 2013
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What is ORSA? Own Risk and Solvency Assessment?
The ORSA is:
A component of an insurer’s ERM framework
A confidential internal assessment
Appropriate to nature, scale, and complexity
Conducted by the insurer
Material and relevant risks to current business plan
Conducted annually
Internal documentation of process and results
Confidential, high level report to be submitted to lead state commissioner
Source: NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual - 2013
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NAIC Timeline of ORSA
NAIC formally adopted the ORSA Guidance Manual in
November, 2011; most recent manual is as of March, 2013
The requirements outline in the Manual are based upon the
NAIC Risk-Management and Own Risk and Solvency
Assessment Model Act #505.
Insurers should refer to the laws adopted by the insurer’s
state of domicile when determining its requirements for risk
management and own risk solvency assessment.
NAIC conducted an ORSA Feedback Pilot Project during
2013.
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The depth and detail of information is to be influenced
by the nature and complexity of the insurer
Can reference other documents to be made available
to the regulator upon examination or upon request
Signature of insurer’s chief risk officer or other
executive with responsibility for oversight of ERM;
attesting the information in the ORSA summary report
has been provided to insurer’s board of directors or
appropriate committee
NAIC ORSA Guidance Manual – Updates as of March 2013
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Insurers Exempt from ORSA
If enacted, all insurers are to comply with ORSA,
except:
Individual insurer’s annual direct written and unaffiliated
assumed premium is less than $500 million
Insurance group (all insurance legal entities within the group)
annual direct written and unaffiliated assumed premium is less
than $1 billion
• Both exclusions above include international direct and assumed premium
but exclude premiums reinsured with the Federal Crop Insurance
Corporation and Federal Flood Program
• Commissioners may require otherwise exempt insurers to meet ORSA
requirement if unique circumstances are present
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How ORSA Relates to ERM
ORSA Section 1: Should include a high level summary
of the ERM Framework principles
•According to the NAIC, an ERM Framework should, at the
minimum, include five key principles, including:
Risk Culture and Governance
Risk Identification and Prioritization
Risk Appetite, Tolerances and Limits
Risk Management and Controls
Risk Reporting and Communication
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How ORSA Relates to ERM
Section 2: Risk Assessments in stressed and normal
environments
Document risk exposure in both normal and stressed
environments
Document outcomes of any plausible adverse
scenarios run
Consider impact of stresses on capital
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How ORSA Relates to ERM
Section 3: Group Risk Capital (GRC) and Prospective
Solvency Assessment
Document how the company combines the qualitative elements
of it’s risk management policy and the quantitative measures of
risk exposures to determine the level of financial resources it
needs to manage its current business over the next 2- 5 years
Purpose- to assist regulators in forming subjective
assessments of the quality of insurer’s risk and capital
management
Examples of GRC: VAR, TVAR, Probability of Ruin
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2013 Pilot Program Observations
ORSA Summary Report Foundation should be:
• Developed from reporting of ERM to the Insurer/Group’s Board of
Directors
• Contain the basic, same elements of this report
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Provide Table of Contents
Include an Executive Summary
Mapping of legal entities to business units described in the
report
Provide list of risk owners
Include Heat Maps
Glossary of terms and acronyms
Reference to other ORSA documents; need to be available
to the regulator upon request
• Appendix of reports and tools with description
2013 ORSA Pilot Observations (cont.)
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2013 ORSA Pilot Observations (cont.)
Comparative view of multi-years financial data
Tables and graphs need to include key/legend and
explanatory text
Use most current data
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Detail of actual risk limits to support the assertion that
Insurer has risk limits
If risk limits have changed, discuss the change
Discuss risks prospectively
Discuss risk mitigation
Provide flowchart of Risk Management & Controls
Explain how compensation & incentives are tied to risk
management
2013 ORSA Pilot Observations (cont.)
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2013 ORSA Pilot Observations (cont.)
Include a discussion of information technology risk
Risk ranking/rating can be provided in varying formats
Discuss emerging risks in the prospective risk section of
ORSA
Identify risks associated with intercompany dependencies
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Perform combined stress scenarios in addition to single
stress scenarios
Create a graphical illustration to compare different model
results (if applicable)
More stress testing on liquidity, especially for life insurance
2013 ORSA Pilot Observations (cont.)
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2013 ORSA Pilot Observations (cont.)
Provide overview and detailed explanation of capital
models
If the Insurer is international, provide overall group capital in
Section 3
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2013 ORSA Pilot Observations (cont.)
In preparation for the actual ORSA filing:
• Attestation Placeholder and signature, including contact information
• Expected Filing Date; reach an understanding with your lead state
regulator
• Walk Through Discussion with Regulator; plan a
meeting/webinar/conference call with your lead state regulator to
describe and walk through the ORSA Summary Report and answer
questions from the regulator
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2014 Pilot Project
The Own Risk and Solvency Assessment (ORSA) (E)
Subgroup will:
Conduct an ORSA Feedback Pilot Project in 2014 with
undisclosed insurers/groups which voluntarily submit an
ORSA Summary Report for regulatory review. The purpose
of the project is to continue to increase regulators’
knowledge and understanding of the ORSA Summary
Reports, to continue to enhance regulatory guidance on the
same and to continue to provide high level (non-company-
specific) feedback to the industry prior to the actual filing of
ORSA Summary Reports.—Essential
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2014 Pilot Project (cont.)
Begin the development of regulator guidance for states’ use
of the ORSA Summary Report in financial analysis and
examination.—Essential
Begin to develop an enterprise risk management (ERM)
education program for regulators that is designed to
maximize the benefit of such training for the ORSA 2015
effective date.—Important
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2014 Pilot Project (cont.)
This will be the third ORSA Feedback Pilot Project
Undisclosed insurance groups/insurers
Further identify any sections in the current NAIC ORSA
Guidance Manual that might need clarification and/or
amendment
Further develop analysis and examination guidance for
regulators
Assist other relevant NAIC committee addressing ERM or
ORSA initiatives
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2014 Pilot Project (cont.)
Only Lead States, Domestic State, Subgroup Members and
NAIC staff will have access to these pilot project ORSA
reports
The names of the volunteer insurers will be held
confidential
A high-level non-insurer specific feedback will be provided
to interested parties and relevant NAIC committees
All ORSA Summary Reports provided by volunteer insurers
will be destroyed either three days after the Financial
Condition € Committee received its high-level summary
report from the subgroup and/or soon after year-end 2014,
whichever is later
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How to do this Assessment
Review analysis processes
Review documentation
Review how you use the information in your ERM cycle
26
Insurance Risk
Model the combined volatility of all of the policies
Part of the ERM cycle
This is the goal of ORSA
Can’t dictate a specific model
Summary document and explanation
How it fits into your ERM cycle
27
Process and Data Crunching
Review of the Financial Planning process
Review the capital adequacy measurement process
How does the measurement of risk impact the
ratemaking processes
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What is the Actual Report?
ORSA Summary Report isn’t the Assessment
Anything referenced should be available upon request
Samples can be provided
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How ORSA Relates ERM
ERM is the foundation for the Company’s ORSA
Section 1 of ORSA ties to ERM
Section 2 and 3 have some similar ERM concepts
• Additional actuarial analysis
ORSA links the risk identification process with capital
management and strategic planning in Section 2 and 3
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ERM/ORSA – Actuarial Perspective
It’s tailored to your own company so there is no one
size fits all process
Typical business risks
ERM at an insurer - we are in the business of risk
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How Does ORSA impact your ERM?
Formalization of the ERM Process
Disclosure with your regulator
Consequences of identifying gaps
Challenges the value of ERM?
Connects ERM to capital modeling, financial and strategic
planning
More time with the Board
Attestation and signature
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Questions
Mary Peter
Director of Enterprise Risk Management
612-253-6662
866-585-9059
Scott Anderson FCAS, MAAA, FCA
SVP & Actuary
651-224-0041
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IASA 86TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Please Complete the Session Evaluation Form on the Conference App and Include Your Conference Registration ID# to be Included in a Drawing for a Free Conference Registration for the 2014 Annual Conference!
NOTE: Your Conference Registration ID# is Located at the
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